Chapter 7 vs. Chapter 13 bankruptcy: What’s the difference?

Chapter 7 and Chapter 13 bankruptcy are two very different legal options with different potential consequences, but both can help if you’re in over your heads with debt.

Chapter 7 bankruptcy, also known as a liquidation, is a legal option that can help you clear some or all of your debt. But it will also mean having to surrender assets, like property or cash, to do so.

Chapter 13 bankruptcy is also a legal option that can help you get some debt discharged, while allowing you to keep your property and repay your debt by completing a three- to five-year repayment plan.

But before filing either type of bankruptcy, consider the type of debt you owe. Neither option lets you discharge the following:

• Child support
• Alimony
• Certain taxes

If your debts are outside of those categories, and you’ve exhausted all other ideas and gotten credit counseling, Chapter 7 or Chapter 13 bankruptcy might be the help you need.

Each has pros and cons, so it’s important to carefully consider which one, if either, is right for you.

Should I file Chapter 7?

Chapter 7 is an option to consider if you have little to no disposable income. In fact, you’ll have to pass a means test to prove that you can’t afford to pay your debt in order to file.

Here are some things to consider if you’re deciding whether Chapter 7 bankruptcy is right for you.

1. It could reduce your monthly debt-repayment load

When you have a debt discharged through Chapter 7 bankruptcy, you’re no longer legally required to pay that debt back. That means the money you were paying toward that loan or credit card, for example, can now be used for other things, like household necessities.

Note that there are a number of exceptions to the debts that can be discharged in Chapter 7, so we recommend contacting a bankruptcy lawyer before you file.

2. It can provide relief from debt collectors

If you can’t afford your unpaid debts, Chapter 7 can be a helpful tool to stop debt collectors from taking action against you. When you file, some of your creditors may be temporarily restricted from …

• Collecting money from you
• Contacting you
• Continuing wage garnishment
• Starting or continuing lawsuits against you or your property

3. You may be able to clear your debts faster with Chapter 7 than with Chapter 13

Where Chapter 13 bankruptcy typically takes three to five years to complete, Chapter 7 generally takes about 90 to 100 days from start to finish, in addition to the time it takes to complete a credit counseling course prior to filing.

4. You will lose some assets

One of the main consequences of filing Chapter 7 is the possible loss of your assets. Depending on the laws in your state, and whether you have equity in certain assets, your cash or property will be at stake.

5. Your credit could take a hit

The other major consequence of a Chapter 7 bankruptcy is the impact to your credit. A Chapter 7 bankruptcy can stay on your credit reports for up to 10 years from the date you file.

That doesn’t mean you’ll never be able to open a credit card or take out a mortgage again, but it does mean you might have to pay a lot more in interest rates and fees when borrowing.

Should I file Chapter 13?

Chapter 13 is a bankruptcy option to look at if you own property that you want to keep.

Here are some things you should consider.

1. If you have sufficient income, you may be required to file Chapter 13

To qualify for a Chapter 7 bankruptcy, you’ll have to prove you can’t repay your debt. If, depending on your income and your state’s median income requirements, your current monthly income is more than your state’s median income for a family of your size, you may not be allowed to file Chapter 7. In this case, Chapter 13 could be the right option for you.

2. It can stop debt collections and the foreclosure process

If you’re a struggling homeowner, Chapter 13 could be the help you’re looking for. Filing Chapter 13 can stop the foreclosure process and give you a chance to catch up on your past-due mortgage payments. And if you have debts in collections, any debts discharged during Chapter 13 means your creditors can no longer take any action to try to collect the money from you.

3. It can help you repay your debt

Chapter 13 can also provide a more convenient and cost-effective way to repay your debt. Through Chapter 13, you’ll make a plan to repay all or some of your debts. You can make one consolidated monthly payment toward your debts based on your repayment plan. This lump payment will then be distributed to your creditors. Your monthly payments may also be reduced for certain types of debts, so you can repay them over the course of your three- to five-year plan.

4. It can take three to five years to discharge your debts

Chapter 7 bankruptcy can help you discharge your debts relatively quickly, but the same isn’t true for Chapter 13. Under Chapter 13, responsibility for your debt doesn’t end until your repayment plan has been completed, which typically takes three to five years.

5. The repayment plan can strain your budget

According to bankruptcy attorney Steven Weiss, you have to pledge your disposable income for the duration of the plan. “That can be difficult, especially if income is variable,” he says.

6. If you can’t stick to the repayment plan, you could lose your Chapter 13 status and maybe even assets

If you’re unable to make your payments under the plan, your bankruptcy case could be dismissed or converted to Chapter 7, which means you could again be in jeopardy of losing assets like your home or car.

Your repayment plan could also be at risk of being dismissed or converted to Chapter 7 by the court if you fail to file required taxes during your case or if you fail to pay domestic support obligations, such as child support and alimony, after filing.

7. The impact on your credit may not be as severe

Like Chapter 7, Chapter 13 bankruptcy may have a very negative impact on your credit. A completed Chapter 13 bankruptcy can stay on your credit reports for up to seven years from the date you file. But some creditors could view a Chapter 13 bankruptcy more favorably than a Chapter 7 bankruptcy. It could be an indication that you repaid more of your debt.

Bottom line

Bankruptcy is a major legal decision with serious consequences. Consider all your options before you decide to file for bankruptcy. Once you’ve considered all your available options and determined it’s the right course of action for you, the next step is to research Chapter 7 and Chapter 13.

If you’ve taken a good look at your situation and your options and you know that you can’t afford to repay your debts, you should talk to an attorney to help you decide which form of bankruptcy could work best for you.