Chapter 7 vs. Chapter 13 Bankruptcy: How the Two Personal Bankruptcy Paths Differ

Chapter 7 and Chapter 13 are the two chapters of the U.S. Bankruptcy Code that individual consumers use, and people mix them up because both are filed in federal bankruptcy court, both trigger the automatic stay that stops most collection activity, and both can end with eligible debts discharged. The difference is the trade: Chapter 7 gives a fast discharge in exchange for giving up nonexempt property, while Chapter 13 lets filers keep their property in exchange for years of payments.

How chapter 7 works

Chapter 7 is sometimes called liquidation bankruptcy. After the petition is filed, a court-appointed trustee takes control of the filer’s nonexempt property, sells it, and distributes the proceeds to creditors. Most Chapter 7 consumer cases are what courts call “no-asset” cases: the filer owns nothing beyond what state or federal exemption laws protect, so there is nothing to sell.

Qualifying for Chapter 7 runs through the means test. Filers whose income is below their state’s median for a household of the same size pass automatically. Filers above the median must complete a longer calculation that subtracts allowed living expenses from income; if the math shows enough leftover income to repay creditors, the filing is presumed abusive and the case can be pushed into Chapter 13. Median income figures are updated regularly, so a bankruptcy court clerk can confirm the current number.

Chapter 7 moves quickly. Most cases reach discharge in four to six months, and the typical unsecured debts – credit card balances, medical bills, personal loans – are wiped out at that point. Some debts survive in either chapter: most student loans, recent income taxes, child support and alimony, and criminal fines are not dischargeable. The filing stays on a credit report for ten years under the Fair Credit Reporting Act.

One more restriction: a filer who received a Chapter 7 discharge within the previous eight years cannot get another one, and filers must complete credit counseling before filing and a debtor education course before the discharge.

How chapter 13 works

Chapter 13 is sometimes called the wage earner’s plan or reorganization bankruptcy. Instead of selling property, the filer proposes a repayment plan that lasts three to five years and makes monthly payments to a trustee, who pays the creditors. The plan must give unsecured creditors at least as much as they would have received if the filer had filed Chapter 7 instead – the “best interests of creditors” test in the Code.

The main draw is keeping property. Filers who are behind on a mortgage can use the plan to catch up on arrears gradually while keeping up with current payments, which is why Chapter 13 is the chapter people use to stop foreclosure. It also works for people with regular income whose earnings are too high to pass the Chapter 7 means test.

The requirements are stricter. Filers need regular income, and there is a combined debt limit on secured plus unsecured debt that Congress adjusts for inflation (currently $2.75 million, so it affects few consumers). Completing the plan ends in a discharge of the remaining eligible debts, and filers who cannot finish because of circumstances beyond their control can ask for a hardship discharge. The filing stays on a credit report for seven years.

Side by side

	Chapter 7	Chapter 13
What it is	Liquidation: a trustee sells the filer’s nonexempt property and the remaining unsecured debts are discharged, usually within four to six months.	Reorganization: the filer keeps property and repays creditors through a court-approved payment plan lasting three to five years.
Who qualifies	Individuals who pass the means test (income below the state median, or too little income to repay debts under the longer calculation); no Chapter 7 discharge in the prior eight years.	Individuals with regular income whose combined secured and unsecured debts fall under the inflation-adjusted limit (currently $2.75 million).
Costs	Court filing fee of $338 (fees change periodically), plus attorney fees that vary by region and case complexity.	Court filing fee of $313 (fees change periodically); attorney fees are commonly paid through the plan itself.
Pros	Fast, typically four to six months; no payments after discharge; most consumer cases are no-asset cases, so filers lose nothing.	Keep your home and other property; catch up on mortgage arrears; stop foreclosure; shorter credit-report impact (seven years vs. ten).
Cons	Nonexempt property can be sold; stays on the credit report for ten years; unavailable to high earners who fail the means test.	Three to five years of payments; a failed plan can mean dismissal of the case; only available to people with regular income.

The verdict

Choose Chapter 7 if your income is modest, your debts are mostly unsecured – credit cards, medical bills, personal loans – and you own little property beyond what exemptions protect. It is the faster, cleaner reset.

Choose Chapter 13 if you have regular income and property worth protecting – a home, a car you need to keep – or you are behind on a mortgage and want to catch up over time. The price is years of court-supervised payments.

Either way, talk to a bankruptcy attorney in your state before filing: exemption rules, median income figures and filing fees all depend on where you live and change over time. This article is general information, not legal advice.

Explainer based on the U.S. Bankruptcy Code (Title 11), the U.S. Courts’ bankruptcy basics, and Federal Trade Commission consumer guidance on bankruptcy.