Chapter 7 vs Chapter 13 Bankruptcy: Key Differences Explained

Published on April 15, 2025 by Casey Yontz, Bankruptcy Attorney

Bankruptcy Basics

Bankruptcy is a legal avenue designed to help individuals overcome overwhelming debts, either by completely eliminating certain obligations or reorganizing them into a repayment plan ^[1]. While both Chapter 7 and Chapter 13 operate under federal law, their processes and outcomes differ in significant ways. Understanding the contrasts between these two chapters can help you determine which route is better suited to your financial situation.

Chapter 7 Bankruptcy: Quick Relief

Definition: Often referred to as “liquidation” bankruptcy, Chapter 7 allows qualifying individuals to erase most unsecured debt, such as credit card balances and medical bills, relatively quickly.
Eligibility: Prospective filers must pass a “means test,” which assesses whether their income falls below the median level in their state. If it does, they are more likely to be eligible ^[2].
Asset Considerations: A court-appointed trustee reviews assets. Any non-exempt possessions may be sold to repay creditors. However, many debtors find most of their assets fall within state or federal exemptions.
Timeline: Chapter 7 cases can often conclude in three to six months, offering a faster resolution compared to other bankruptcy types.

Chapter 13 Bankruptcy: Structured Repayment

Definition: Chapter 13 reorganizes debts under a court-approved plan, usually spanning three to five years ^[3]. Filers make monthly payments based on their disposable income.
Eligibility: This option is generally suited for individuals who exceed the income threshold for Chapter 7 or wish to preserve certain assets. You must demonstrate a stable income to handle regular payments.
Asset Protection: Debtors retain their property as long as they adhere to the repayment schedule. This can be particularly advantageous for those behind on mortgage or car payments.
Timeline: Because it involves a longer payout period, Chapter 13 necessitates a more extended commitment. Upon successful completion, remaining eligible debts can be discharged.

Major Differences at a Glance

One of the primary contrasts between Chapter 7 and Chapter 13 is the approach to debts and assets. Chapter 7 aims for a quicker discharge but may require liquidating certain non-exempt property. Chapter 13 involves a more prolonged process, granting debtors the opportunity to hold onto most, if not all, of their assets, provided they consistently follow the court-approved repayment plan.

Additionally, a Chapter 7 bankruptcy can appear on a credit report for up to 10 years, whereas Chapter 13 usually remains for up to seven years ^[4]. Despite this, both forms of bankruptcy serve as a powerful financial reset, offering relief from creditor actions and a chance to restore long-term financial health.

Final Thoughts

Deciding between Chapter 7 and Chapter 13 bankruptcy is a critical choice that hinges on factors like your income, types of debt, and long-term financial objectives. Consulting an experienced bankruptcy attorney is essential for evaluating your eligibility and safeguarding your assets. By choosing the most suitable chapter, you can take a decisive step toward debt relief and renewed financial stability.

References

United States Courts. (2023). Filing for Bankruptcy Without an Attorney. Retrieved from https://www.uscourts.gov/services-forms/bankruptcy/filing-without-attorney
11 U.S.C. § 707(b). (2023). Means Testing for Chapter 7 Eligibility. Retrieved from https://uscode.house.gov/
United States Bankruptcy Court. (2023). Chapter 13 – Reorganization. Retrieved from https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics
Federal Trade Commission. (2023). Credit and Your Consumer Rights. Retrieved from https://www.consumer.ftc.gov/

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