TL;DR
The two most common types of personal bankruptcy — Chapter 7 and Chapter 13 — work very differently. Here is how to determine which one is right for your situation.
Bankruptcy Chapter 7 vs Chapter 13: Which Is Right for You?
When debt becomes overwhelming, bankruptcy can provide a path to financial relief. For individuals, the two most common options are Chapter 7 (liquidation) and Chapter 13 (reorganization). Understanding the differences is crucial to making the right choice.
Chapter 7: Liquidation Bankruptcy
How It Works
In Chapter 7, a court-appointed trustee reviews your assets and may sell non-exempt property to pay creditors. Most unsecured debts (credit cards, medical bills, personal loans) are discharged, giving you a fresh start.
Eligibility
To qualify for Chapter 7, you must pass the means test — your income must be below your state's median income, or your disposable income after allowed expenses must be insufficient to repay debts.
Timeline
Chapter 7 is relatively quick — most cases are completed in 3-6 months.
What You Can Keep
Bankruptcy exemptions protect certain assets from liquidation. Common exemptions include:
- Your primary home (up to a certain amount of equity)
- Your car (up to a certain value)
- Retirement accounts
- Basic household goods
- Tools of your trade
Exemption amounts vary significantly by state.
What Debts Are Discharged
- Credit card debt
- Medical bills
- Personal loans
- Utility bills
- Most other unsecured debts
Chapter 13: Reorganization Bankruptcy
How It Works
In Chapter 13, you propose a 3-5 year repayment plan to pay back some or all of your debts. You keep all your assets as long as you complete the plan.
Eligibility
You must have regular income and your secured and unsecured debt must be below certain limits (currently $1,395,875 secured and $465,275 unsecured).
Key Advantages Over Chapter 7
- Save your home — You can catch up on mortgage arrears through the repayment plan
- Keep non-exempt assets — No liquidation of property
- Discharge more debts — Some debts dischargeable in Chapter 13 are not dischargeable in Chapter 7
- Co-debtor protection — Protects co-signers on consumer debts
Comparison Table
| Feature | Chapter 7 | Chapter 13 |
|---|---|---|
| Timeline | 3-6 months | 3-5 years |
| Asset liquidation | Possible | No |
| Means test required | Yes | No |
| Home foreclosure | Cannot stop | Can stop |
| Repayment plan | No | Yes |
| Credit report | 10 years | 7 years |
Which Is Right for You?
Choose Chapter 7 if:
- You pass the means test
- You have few non-exempt assets
- You are not behind on your mortgage
- You want a quick resolution
Choose Chapter 13 if:
- You earn too much for Chapter 7
- You want to save your home from foreclosure
- You have non-exempt assets you want to keep
- You have debts that are not dischargeable in Chapter 7
Consult a bankruptcy attorney to determine which option is best for your specific situation. Find one near you on NinjaLawyers.