If debt has become unmanageable, bankruptcy can offer a legal fresh start. For individuals, that almost always means one of two chapters of the U.S. Bankruptcy Code: Chapter 7 or Chapter 13.
The two share some features. Both stop most collection activity, both are handled in federal bankruptcy court, and both can eliminate many debts. But they work very differently. This guide explains the main differences so you can have a more informed conversation with a bankruptcy attorney.
Key takeaways
- Chapter 7 is “liquidation”: a trustee may sell non-exempt property, and most qualifying debts are discharged in a few months.
- Chapter 13 is “reorganization”: you keep your property and repay some or all of your debts through a three- to five-year plan.
- Eligibility for Chapter 7 depends on the means test, which compares your income to your state’s median.
- Chapter 13 can help you save a home from foreclosure by catching up on missed payments over time.
- Both chapters trigger the automatic stay, which immediately stops most collection actions.
Chapter 7: liquidation
How it works
In Chapter 7, a court-appointed trustee reviews your finances. The trustee can sell any property that isn’t protected by exemptions and distribute the proceeds to creditors. Then the court grants a discharge, which permanently wipes out your personal liability for most unsecured debts, such as:
- Credit card debt
- Medical bills
- Personal loans
- Many past-due utility bills
- Deficiency balances after a repossession or foreclosure, in many cases
What you keep
Despite the “liquidation” label, most Chapter 7 cases are no-asset cases: everything the person owns is covered by exemptions, so nothing is sold. Exemptions vary by state and commonly protect some equity in a home and car, household goods, tools of your trade, and most retirement accounts. Some states let you choose between state and federal exemptions.
How long it takes
A typical Chapter 7 case moves quickly. You attend a short meeting of creditors (the “341 meeting”) about a month after filing, and the discharge is usually entered roughly three to four months after you file.
Who qualifies
You must pass the means test. If your household income is below your state’s median for your household size, you generally qualify. If it’s above, a more detailed calculation of your expenses determines whether you have enough disposable income to repay creditors. See our guide to the bankruptcy means test.
You also can’t receive a Chapter 7 discharge if you received one in a case filed within the previous eight years.
Chapter 13: repayment plan
How it works
In Chapter 13, you keep your property and propose a repayment plan lasting three or five years. You make one monthly payment to a Chapter 13 trustee, who distributes it to creditors. The plan length depends largely on your income: those below the state median can often propose a three-year plan, while those above usually need five years.
The plan must pay:
- Priority debts, such as recent tax debts and domestic support arrears, in full
- Missed mortgage or car payments you want to catch up on, if you want to keep the property
- Unsecured creditors at least as much as they would have received in Chapter 7, plus your projected disposable income. Many plans pay unsecured creditors only a small percentage.
When you complete the plan, remaining eligible debts are discharged.
Why people choose Chapter 13
- Saving a home from foreclosure. Chapter 13 lets you catch up on mortgage arrears over the life of the plan while keeping up with current payments. Chapter 7 offers no way to do this.
- Keeping non-exempt property. If you have equity a Chapter 7 trustee would sell, you can keep it in Chapter 13 by paying its value through the plan.
- Not qualifying for Chapter 7. If your income is too high, Chapter 13 may be the main option.
- Handling debts Chapter 7 can’t. Chapter 13 can spread out tax debts and support arrears and can sometimes “cram down” certain secured debts to the property’s value.
- Stripping off junior mortgages. In some cases, a second mortgage that is entirely underwater can be treated as unsecured.
Who qualifies
You need regular income to fund the plan, and your debts must fall under limits set in the Bankruptcy Code, which are adjusted periodically.
Downsides
Chapter 13 is a long commitment. Many plans fail, often because of job loss or unexpected expenses. If a plan fails, the case may be dismissed without a discharge, or converted to Chapter 7. Attorney’s fees are also usually higher, although they can often be paid partly through the plan.
Side-by-side comparison
| Chapter 7 | Chapter 13 | |
|---|---|---|
| Basic approach | Liquidation of non-exempt assets | Repayment plan |
| Typical length | About 3–4 months | 3–5 years |
| Income test | Means test | Regular income needed to fund a plan |
| Keep non-exempt property? | Trustee may sell it | Yes, if you pay its value through the plan |
| Stop foreclosure long-term? | Only delays it | Can cure mortgage arrears over time |
| Stays on credit report | Up to 10 years | Up to 7 years |
| Refiling waiting period | 8 years between Chapter 7 discharges | Varies depending on prior chapter |
What bankruptcy doesn’t do
Neither chapter discharges every debt. Common debts that usually survive include most student loans, child support and alimony, many tax debts, criminal fines and debts from fraud. See which debts can’t be wiped out in bankruptcy.
Bankruptcy also doesn’t eliminate a lien on secured property. If you want to keep a mortgaged house or financed car, you’ll generally need to keep paying for it.
Requirements before you file
Both chapters require you to complete a credit counseling course from an approved provider within 180 days before filing, and a debtor education course before receiving a discharge. You’ll also need to disclose all assets, debts, income and recent transactions in detailed schedules. Hiding assets or lying in a bankruptcy case is a federal crime.
Frequently asked questions
Will I lose my house in bankruptcy?
Not necessarily. Many people keep their homes, especially if their equity is protected by an exemption and they are current on their mortgage. Chapter 13 is often used to save a home where payments are behind. See will you lose your house or car if you file for bankruptcy.
How does bankruptcy affect my credit?
It is a significant negative mark, but many people already have damaged credit when they file. Many filers start rebuilding credit soon after discharge, and the effect lessens over time.
Can I file without a lawyer?
You can, and some people do in simple Chapter 7 cases. Chapter 13 is much more complex, and mistakes in either chapter can cost you property or your discharge. Many bankruptcy attorneys offer free consultations.
Can I switch from Chapter 13 to Chapter 7?
Often, yes, if you qualify for Chapter 7 at the time. People sometimes convert when their circumstances change and they can no longer afford the plan.
When to talk to a bankruptcy lawyer
Talk to a bankruptcy attorney before you file, before you transfer property or repay family members, and as early as possible if you’re facing foreclosure, wage garnishment or a lawsuit. Timing can significantly affect what you can protect, and a lawyer can tell you which chapter, if any, fits your situation, and whether alternatives like debt negotiation make more sense.