Chapter 7 vs. Chapter 13 Bankruptcy: Which One is Right for You?

## Chapter 7 vs. Chapter 13 Bankruptcy: Which One is Right for You?

When facing overwhelming debt, bankruptcy can provide a fresh start. However, choosing between Chapter 7 and Chapter 13 bankruptcy is a significant decision that depends on your financial situation. This blog post will explore the key differences between these two types of bankruptcy, their eligibility requirements, and how each impacts your assets, debts, and credit score.

### **Differences Between Chapter 7 and Chapter 13 Bankruptcy**

**Chapter 7 Bankruptcy (Liquidation)**:

- **Process**: Chapter 7 bankruptcy is often referred to as liquidation bankruptcy. In this process, a bankruptcy trustee sells non-exempt assets to pay creditors. Most unsecured debts, such as credit card balances and medical bills, can be discharged, meaning you are no longer legally obligated to pay them[1][3].

- **Duration**: The entire process typically takes about three to six months from filing to discharge[5].

- **Asset Impact**: While some assets may be sold, many personal belongings are often exempt from liquidation under state or federal laws. This means that filers can retain essential items like clothing and household goods[6].

**Chapter 13 Bankruptcy (Repayment Plan)**:

- **Process**: In contrast, Chapter 13 is known as reorganization bankruptcy. It allows individuals with a regular income to create a repayment plan to pay back a portion of their debts over three to five years. This option is particularly beneficial for those who want to keep their homes or cars while catching up on missed payments[4][5].

- **Duration**: The repayment plan lasts for three to five years, during which you make regular payments to a bankruptcy trustee who distributes the funds to creditors[1][2].

- **Asset Impact**: Unlike Chapter 7, Chapter 13 does not involve liquidation of assets. Debtors can keep their property while repaying debts according to the approved plan[3].

### **Eligibility Requirements**

**Chapter 7 Eligibility**:

- To qualify for Chapter 7, you must pass the means test, which assesses your income against the median income for your state. If your income is below this threshold or if you have little disposable income after necessary expenses, you may qualify for Chapter 7[5][6].

**Chapter 13 Eligibility**:

- Individuals can file for Chapter 13 if they have a regular income and their secured and unsecured debts do not exceed specific limits (currently $2,750,000 combined as of 2024) [1][2]. There is no means test for Chapter 13; however, you must demonstrate that you can adhere to the repayment plan based on your income.

### **Impact on Assets, Debts, and Credit Score**

- **Assets**: In Chapter 7, non-exempt assets may be liquidated to settle debts. In contrast, Chapter 13 allows you to retain all your assets while making payments according to a court-approved plan.

  

- **Debts**: Both chapters discharge certain unsecured debts; however, Chapter 13 requires you to repay some portion of your debts over time. Certain debts like child support and student loans typically cannot be discharged in either chapter[1][3].

- **Credit Score Impact**: Both types of bankruptcy will affect your credit score negatively. However, Chapter 7 remains on your credit report for up to ten years, while Chapter 13 stays for up to seven years from the filing date[1]. Because Chapter 13 involves a repayment plan, it may have less impact on your credit score in the long run compared to the complete discharge of debts in Chapter 7.

### **Conclusion**

Choosing between Chapter 7 and Chapter 13 bankruptcy depends on various factors including your income level, asset ownership, and financial goals. If you need immediate relief from unsecured debts and do not have significant assets at risk, Chapter 7 might be the right option. However, if you wish to retain your property and have a steady income that allows for repayment over time, Chapter 13 could be more suitable.

Consulting with a qualified bankruptcy attorney can help clarify which option aligns best with your financial situation and long-term objectives. Understanding the implications of each type of bankruptcy will empower you to make an informed decision on your path toward financial recovery.

Citations:

[1] https://www.experian.com/blogs/ask-experian/bankruptcy-chapter-7-vs-chapter-13/

[2] https://www.canb.uscourts.gov/faq/general-bankruptcy/what-difference-between-bankruptcy-cases-filed-under-chapters-7-11-12-and-13

[3] https://www.boginmunns.com/faqs/whats-the-difference-between-chapter-7-and-chapter-13-bankruptcy/

[4] https://www.christiearkovich.com/why-should-i-file-a-chapter-13-instead-of-a-chapter-7-bankruptcy.html

[5] https://www.nolo.com/legal-encyclopedia/what-is-the-difference-between-chapter-7-chapter-13-bankrutpcy.html

[6] https://www.steerslawfirm.com/what-bankruptcy/

[7] https://www.farmermorris.com/faqs/what-is-the-difference-between-chapter-13-and-chapter-7-bankruptcy/

[8] https://www.experian.com/blogs/ask-experian/credit-education/bankruptcy-how-it-works-types-and-consequences/