Chapter 7 vs. Chapter 13 Bankruptcy: What’s the Difference and Which Is Right for You?
If you’re dealing with overwhelming debt, bankruptcy may be the key to a financial fresh start. In the United States, the two most common types of personal bankruptcy are Chapter 7 and Chapter 13. While both can help you manage or eliminate debt, they work very differently. This guide will walk you through the difference between Chapter 7 and Chapter 13 bankruptcy so you can better understand which option may be right for you.
What Is Chapter 7 Bankruptcy?
(Liquidation Bankruptcy)
Chapter 7 bankruptcy is often called “liquidation bankruptcy” because it involves selling certain non-exempt assets to repay creditors. However, thanks to bankruptcy exemptions, many people keep most or all of their property.
Key Features of Chapter 7 Bankruptcy:
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Debt Discharge: Wipes out most unsecured debts like credit cards, medical bills, and personal loans.
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Speed: Typically completed in 3–6 months.
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Eligibility: You must pass the means test, which compares your income to your state’s median.
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Credit Impact: Remains on your credit report for up to 10 years.
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Best For: People with little to no disposable income who cannot afford to repay their debts.
What Is Chapter 13 Bankruptcy?
(Reorganization Bankruptcy)
Chapter 13 bankruptcy is known as “reorganization bankruptcy” because you create a structured repayment plan lasting 3–5 years. Instead of selling assets, you make monthly payments to a court-appointed trustee, who distributes them to your creditors.
Key Features of Chapter 13 Bankruptcy:
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Debt Repayment Plan: Allows you to catch up on missed mortgage or car payments.
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Asset Protection: Lets you keep your property as long as you follow the repayment plan.
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Eligibility: You must have a steady income and meet debt limit requirements.
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Credit Impact: Stays on your credit report for up to 7 years.
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Best For: People who have regular income and want to prevent foreclosure or repossession.
Chapter 7 vs. Chapter 13 Bankruptcy: Quick Comparison Table
| Feature | Chapter 7 Bankruptcy | Chapter 13 Bankruptcy |
|---|---|---|
| Type | Liquidation | Repayment Plan |
| Timeframe | 3–6 months | 3–5 years |
| Eligibility | Must pass means test | Steady income + debt limits |
| Property | May lose non-exempt assets | Keep property if plan is followed |
| Credit Report | 10 years | 7 years |
| Best For | No way to repay debts | Want to catch up and keep assets |
Which Bankruptcy Is Right for Me?
Choosing between Chapter 7 vs Chapter 13 bankruptcy depends on your income, assets, and financial goals:
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If you need a quick discharge of unsecured debt and have limited income, Chapter 7 might be the better fit.
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If you want to keep your property and can commit to a repayment plan, Chapter 13 may be the smarter choice.
Talk to a Bankruptcy Attorney Before Deciding
The difference between Chapter 7 and Chapter 13 bankruptcy is significant, and the right choice depends on your unique financial situation. An experienced bankruptcy attorney can explain eligibility rules, exemptions, and the potential long-term effects on your finances—helping you choose the option that truly gives you a fresh start.