In this article:
- How Does Bankruptcy Work?
- Chapter 7 Bankruptcy vs. Chapter 13 Bankruptcy
- What Are Eligibility Rules for Bankruptcy?
- Will I Need to Repay All of My Debts in Chapter 7 and Chapter 13 Bankruptcy?
- How Does Filing Bankruptcy Impact Credit?
- Is It Better to File Chapter 7 or Chapter 13 Bankruptcy?
- How Do I Apply for Bankruptcy?
There are many differences between Chapter 7 and Chapter 13, the two main forms of bankruptcy available to individuals and couples in the U.S. The chief contrasts concern how each procedure goes about pursuing full or partial repayment for your creditors—the people and companies you owe money.
In Chapter 7, an option if your financial means fall below a specified limit, assets valued beyond an exempt amount must be forfeited and sold, and the proceeds are distributed among your creditors. In a Chapter 13 proceeding, a bankruptcy trustee collects monthly payments from you for a period of three to five years in order to repay your creditors.
How Does Bankruptcy Work?
Bankruptcy is a legal process, overseen by federal courts in the U.S., that protects individuals, couples and businesses from financial ruin due to overwhelming debt. Upon successful completion of a Chapter 7 or Chapter 13 bankruptcy, many (but not all) consumer debts are discharged, or eliminated.
Debts that can be discharged through bankruptcy include:
- Unpaid credit card bills and outstanding balances
- Medical bills
- Unpaid rent and utility bills
Debts that cannot be discharged through bankruptcy include:
- Unpaid alimony and child support payments
- Certain unpaid taxes and criminal fines
- Certain federal student loans
Chapter 7 Bankruptcy vs. Chapter 13 Bankruptcy
The table below summarizes the major differences between Chapter 7 and Chapter 13 bankruptcy, as they apply to individuals or couples:
| Chapter 7 | Chapter 13 | |
|---|---|---|
| Type of bankruptcy | Liquidation | Reorganization |
| Who can file? | Individuals and business entities | Individuals only (including sole proprietors) |
| Eligibility restrictions | Disposable income must be low enough to pass the Chapter 7 means test | Cannot have more than $2,750,000 in combined secured and unsecured debt (as of 2024) |
| How long does it take to receive a discharge? | Typically three to five months | Three to five years (following completion of a repayment plan) |
| What happens to property in bankruptcy? | Trustee can sell all nonexempt property to pay creditors | Debtors can keep property but must pay unsecured creditors an amount equal to the value of nonexempt assets |
| Allows removal of unsecured junior liens from real property through lien stripping? | No | Yes (if requirements are satisfied) |
| Allows reduction of principal loan balance on secured debts through a loan cramdown? | No | Yes (if requirements are satisfied) |
| Benefits | Allows debtors to quickly discharge most debts and get a fresh start | Allows debtors to keep their property and catch up on missed mortgage, car and nondischargeable priority debt payments |
| Drawbacks | Trustee can sell nonexempt property; does not provide a way to catch up on missed payments to avoid foreclosure or repossession | Must make monthly payments to the trustee for three to five years; may have to pay back a portion of general unsecured debts |
What Are Eligibility Rules for Bankruptcy?
Determining which type of bankruptcy you're eligible for depends greatly on your income.
If your current monthly income falls below the median for your community, you are eligible for Chapter 7 bankruptcy. If your income exceeds that amount, a means test is required to determine Chapter 7 eligibility. The test compares your household income and expenses to median values for your community. If the test finds financial means that exceed a legal threshold, your Chapter 7 filing is said to have a presumption of abuse. That means you must either pursue Chapter 13 or show special circumstances (via additional paperwork) to permit Chapter 7 to proceed.
You can qualify for Chapter 13 bankruptcy if you have regular income and your total secured and unsecured debts are less than $2,750,000 (the limit for 2024) on the date you file for bankruptcy.
Will I Need to Repay All of My Debts in Chapter 7 and Chapter 13 Bankruptcy?
No. Neither Chapter 7 nor Chapter 13 insists on repayment of all outstanding debts.
In Chapter 7, if you have assets of value in excess of the amount exempt by state and federal law, they are sold and the proceeds are distributed to your creditors. If those funds are insufficient to cover all of your dischargeable debts (as is often the case), your obligation to pay any remaining portion of those debts is eliminated.
A Chapter 13 repayment plan must be structured to enable full repayment of priority debts such as delinquent alimony and child support payments. It can also be used to bring you current on delinquent mortgage or car payments, and allow you to keep nonexempt assets such as boats or vacation property. However, if you retain nonexempt assets, your payment plan must allocate unsecured creditors—those whose debts are dischargeable through bankruptcy—with funds equal to the value of your nonexempt property. If non-priority unsecured debts aren't fully repaid by the end of your three- to five-year repayment term, any additional amounts you owe toward them will be discharged.
Some debts, however, may not be eligible for discharge under either type of bankruptcy, including:
- Mortgages
- Tax debts or government fees
- Auto loans
- Child support or alimony
- Student loans
How Does Filing Bankruptcy Impact Credit?
Bankruptcy is recorded on your credit reports, and will adversely impact your credit scores and creditworthiness the entire time it is on your report. Chapter 7 bankruptcy remains on your credit report for up to 10 years, and Chapter 13 stays there for up to seven years, both dated from the month you file for bankruptcy. The negative credit score impact of bankruptcy eases as time passes, but some lenders refuse to extend loans or credit to anyone with a bankruptcy entry on their credit report.
The number of points a bankruptcy lowers your credit score can vary depending on your starting score and whether your scores have already been knocked down by late payments and excessive credit card balances, as is often the case for bankruptcy
Is It Better to File Chapter 7 or Chapter 13 Bankruptcy?
If you qualify to file for either Chapter 7 or Chapter 13 bankruptcy, choosing which procedure to follow depends on your circumstances.
If you have steady income and are behind on mortgage and/or car payments but wish to keep your home or car, a Chapter 13 repayment plan is your only option for preventing foreclosure and/or repossession. (Filing Chapter 7 temporarily halts foreclosures and repossessions, but cannot prevent a lender from seizing an asset used to secure an unpaid loan.)
Chapter 13 also has the benefit of expiring from your credit report more quickly than Chapter 7. Be aware, however, that failure to keep up with payments under a Chapter 13 plan can leave you with little option but eventually filing Chapter 7 anyway.
If you have relatively few assets (and especially if the value of those fall below the amount exempted by applicable laws), Chapter 7 can eliminate dischargeable debt relatively quickly —typically within three to five months of your filing date—so you can start rebuilding your finances fast.
How Do I Apply for Bankruptcy?
Before filing for either type of individual bankruptcy, you must obtain pre-bankruptcy credit counseling from a court-approved certified credit counselor. This counselor, who may charge a fee that typically cannot exceed $50 (or waive it, in cases of financial hardship) can help you sort out your options and provide guidance on the paperwork you must submit with your bankruptcy filing. All necessary forms are available to download free from the U.S. Bankruptcy Court website.
Along with the necessary paperwork, filing for bankruptcy comes at a cost in the form of court fees. The fees for filing are $338 for Chapter 7 and $313 for Chapter 13. Additional administrative fees may apply if certain documents or addenda must be filed in connection with your case.
If you file for Chapter 7, you can ask the court to permit you to pay your court fees in installments or, if your income is sufficiently low, you may ask the court to waive your fees altogether.
Finalization of both Chapter 7 and Chapter 13 cases requires completion of a debtor education class, available through court-authorized providers who may charge fees that typically do not exceed $50.
Whether you file for Chapter 7 or Chapter 13 bankruptcy, it's typically a good idea to hire a lawyer to help with your bankruptcy. Even minor mistakes or missing a deadline by a day could get your petition thrown out. Attorney fees can differ by locality, and also depend on the nature and complexity of your case.
Legal fees must be paid upfront in Chapter 7 cases but may be rolled into the repayment plan with a Chapter 13 filing. Since funds are typically tight for bankruptcy applicants, local legal aid offices and online legal resources such as Upsolve may be helpful legal resources.
The Bottom Line
Chapter 7 and Chapter 13 bankruptcy differ in their approaches to repaying your creditors and their ability to protect assets you may want to keep. While both can provide relief from crippling debt, they also do significant harm to your credit and ability to borrow money. With patience and care, you can rebuild your credit after bankruptcy, and free credit monitoring from Experian can help you track your progress as your credit scores rebound.
