Chapter 13 vs Chapter 7: Which Is Right for Me?

Deciding whether or not to file for bankruptcy isn’t easy. Before filing a bankruptcy petition, you must decide which type of bankruptcy is right for you. 

You may opt for a Chapter 7 bankruptcy if you don’t have a lot of assets and most of your debt is unsecured. If you have a home and it’s at risk of foreclosure, a Chapter 13 bankruptcy may be a better choice. The debtor proposes a repayment plan that allows them to keep their home and pay creditors over time, which the bankruptcy trustee administers after court approval.

This article examines and explains the differences between Chapter 7 and Chapter 13 bankruptcy. It also discusses the benefits each type offers and how to decide which form of bankruptcy will help you achieve debt relief.

It’s not a bad idea to contact a skilled bankruptcy attorney if you’re considering bankruptcy and are unsure which route to take. Their legal advice can help guide you through the bankruptcy process.

What Is the Purpose of Filing Bankruptcy?

People file for bankruptcy for different reasons. Some people want the bankruptcy court to wipe out their debt, while others are seeking a reorganization of their secured and unsecured debts.

If you want a fresh start and hope the bankruptcy judge will discharge your debts, you’ll want to file for Chapter 7 bankruptcy. In a Chapter 7, the trustee will sell any assets you have and use the proceeds to pay your creditors. Once they do this, the judge will discharge any remaining debts.

Chapter 13 bankruptcy filers aren’t asking the court to erase their debts. Instead, they realize they’re in over their heads and want someone to step in, stop any collection activity, and create a short-term repayment plan.

Deciding which chapter is best for you depends on several things, such as the amount of debt you owe. You’ll also need to look at the type of debts you’re carrying. Armed with the right information, a bankruptcy attorney can check to see if you qualify either type of bankruptcy.

Differences Between Chapter 7 and Chapter 13 Bankruptcies

One  of the things a Chapter 7 and a Chapter 13 bankruptcy have in common is that they protect filers from their creditors and help ease their financial stress. When you file for either chapter, the court imposes something called an automatic stay. This prohibits creditors from pursuing collection action against a debtor during bankruptcy proceedings.

Another thing the two types of bankruptcy share is that the U.S. Bankruptcy Code governs them both. Otherwise, Chapter 7 and Chapter 13 are very different.

Some of the critical differences between Chapter 13 and Chapter 7 bankruptcy include:

• People file Chapter 7 if they want the court to erase their debts and give them a fresh start. Chapter 13 does not offer a completely fresh start. Instead, it allows the debtor to repay their creditors over three to five years.
• Once your Chapter 7 bankruptcy case is complete, you can start over. Filers do not have to repay any of their unsecured creditors. If they don’t reaffirm any of their secured debt, they won’t have to repay their secured creditors either. In a Chapter 13 case, the debtor must repay their secured creditors if they expect to hold on to their property. The trustee will also require the filer to make payments to their unsecured creditors.
• A Chapter 7 bankruptcy is often over in a few months. A Chapter 13 bankruptcy case takes three to five years to complete.
• A typical Chapter 7 bankruptcy case will cost you $1,000 to $1,750 in attorney fees and another $338 in filing fees. The costs for Chapter 13 are much higher. In addition to the filing fee of $313, attorney fees can range between $2,500 to $6,000, depending on the complexity of your case.
• A Chapter 13 case allows the inclusion of attorney fees in the repayment plan. With a Chapter 7, you usually have to pay the entire amount upfront or before the court discharges your case.
• A Chapter 7 bankruptcy will cause your credit score to decrease by about 160 to 220 points. It will also stay on your credit history for up to ten years. With Chapter 13 bankruptcy, the immediate impact on your credit score is lower because you’ll make monthly payments to your creditors. A Chapter 13 only stays on your credit report for up to seven years.
• The eligibility requirements for the two chapters are entirely different. Chapter 7 applicants must pass a means test to qualify. This test demands that your income is less than 150% of your state’s median income. With Chapter 13, you must show that you have sufficient regular income to honor your payment plan.

These are just some of the differences between the two forms of bankruptcy. 

Eligibility for Filing a Chapter 7 vs. Chapter 13 Bankruptcy

The eligibility requirements for Chapter 7 are entirely different from those for Chapter 13. In a Chapter 7 bankruptcy case, the judge wants to see that the debtor cannot afford to pay back their debts. In a Chapter 13 case, the judge wants to see that the filer can afford the monthly payments on their Chapter 13 plan.

To file for Chapter 7, you must pass the means test. If your average monthly income is less than the state median income, you will more than likely qualify for Chapter 7. The judge will still examine whether you could make payments through a Chapter 13.

If your income exceeds the state’s median income, you might not qualify for Chapter 7. The trustee will complete the second part of the means test, where they calculate your disposable income. This is the income that remains after accounting for your monthly expenses.

If you still exceed the state median income after this second part of the test, you cannot file a Chapter 7 bankruptcy. The court can either convert your case to a Chapter 13 or dismiss your case.

In a Chapter 13 bankruptcy case, the court is more concerned with whether you can afford the payments outlined in your repayment plan. The trustee will also determine how much you owe your secured and unsecured creditors.

Chapter 13 is available to individuals with regular income and total noncontingent, liquidated debts under the current combined debt limit (about $2.75 million, periodically adjusted). This means your total unsecured and secured debt can’t be over that amount. If you have qualifying debt, the trustee will then look at your income to determine whether you’ll have a three-year or five-year repayment plan.

The trustee will require a five-year payment plan if your income is higher than your state’s median income. You will qualify for a three-year repayment plan if your income is less than the median. If you make more than the state median income, the court will assume you can afford to make payments for a longer period and a larger total amount.

Benefits of Filing for Bankruptcy

If you can’t afford to pay your debt, bankruptcy may provide the proverbial “light at the end of the tunnel.”A Chapter 7 (or liquidation bankruptcy) may work best for you if you need a clean slate. If you want to keep your assets and repay lenders over time, a Chapter 13 is a better fit.

There are pros and cons of filing both types of bankruptcy. Let’s take a look at what they each have to offer.

Advantages of Filing a Chapter 7 Bankruptcy Case

People often file for Chapter 7 because they owe a lot of money on credit cards, personal loans, and other accounts, and cannot afford to repay them. The best way to rid yourself of this debt is to file a Chapter 7 and secure a bankruptcy discharge.

When considering your bankruptcy options, you should consider the following benefits of a Chapter 7:

• Most Chapter 7 bankruptcy cases resolve within a few months
• Once the judge discharges your debt, you won’t have to pay back your unsecured creditors for credit card balances due or high-interest loans
• An automatic stay means that your creditors cannot pursue you during bankruptcy proceedings and the company financing your car loan cannot threaten repossession during your bankruptcy case
• You won’t have to pay back your enormous medical bills
• The court may discharge some of your old tax debt
• It is relatively inexpensive to file for Chapter 7, and, if you cannot afford to pay the filing fee all at once, the court may either waive the fee altogether or allow you to pay the fee in installments

These are just some of the benefits of filing Chapter 7 bankruptcy. It’s very important to understand that a Chapter 7 filing will have a seriously negative effect on your credit rating for a long time. This will make it difficult to get loans or a mortgage. You’ll also face extremely high interest rates for any credit cards you apply for. 

Benefits of Filing for Chapter 13 Bankruptcy

Chapter 7 isn’t the best solution for everybody. Sometimes, a Chapter 13 bankruptcy offers a more workable solution. If you are behind on your mortgage payments but want to keep your home, a Chapter 13 may allow you to do that.

There are other benefits of a Chapter 13 as well, including:

• You get to make debt payments over time, so they are more affordable
• A Chapter 13 protects you from creditors until your repayment plan is complete
• The automatic stay generally prevents most collection and lien enforcement during the case, although existing liens remain and must be addressed in your plan
• You get to keep assets while paying unsecured creditors at least as much as they’d receive in Chapter 7, and the trustee typically won’t sell your property
• You can get back on track with your student loans

Regardless of which chapter you decide to file, seeking legal advice before filing your petition is a good idea. There are ramifications for filing both types of bankruptcy, and you should be aware of them before you take any legal action.

Disclaimer: State and federal laws change frequently, due to new legislation, higher court rulings, and other means. While FindLaw strives to provide readers with the most current information, consult a local bankruptcy attorney to confirm your state laws.

An Experienced Bankruptcy Attorney Can Help with Your Case

The decision to file for bankruptcy is complicated, and the type of bankruptcy you file depends on your financial situation. If you aren’t sure whether bankruptcy is the best option for you, contact a local bankruptcy lawyer for help.

Your attorney will help you choose which type of bankruptcy to pursue and will stand by you throughout the bankruptcy process. A seasoned bankruptcy attorney can assess your situation and explain your options during your initial consultation.

Additional Resources:

• Chapter 7 Bankruptcy
• Who Can File for Chapter 13 Bankruptcy
• Debts That Remain After a Chapter 13 Discharge