Chapter 7 vs Chapter 13 Bankruptcy: Understand the Differences

This article is for informational purposes only, and should not be construed as legal advice. For legal advice, please consider a free bankruptcy attorney consultation.

I often hear from people who are curious about the differences between Chapter 7 bankruptcy and Chapter 13 bankruptcy. It’s a common question, and if you’re feeling confused about which option might be right for you, you’re definitely not alone. Let’s dive into the key differences and help you find clarity you need.

I once explained it like this: think of both chapters as numbers. Since 7 is smaller than 13, you can use that to remember the difference.

• Chapter 7 bankruptcy is often shorter than Chapter 13 bankruptcy.
• Chapter 7 bankruptcy is often cheaper than Chapter 13 bankruptcy.

Here’s an example personalized estimate from our free Chapter 7 vs Chapter 13 calculator that shows the differences in terms of amount and duration.

That said, there are so many other differences between the two bankruptcies, so here’s what we are going to cover in this article.

Also, this article is extremely long, so please jump around to whatever you feel is a best use of your time.

So, let’s get started.

What is a Chapter 7 Bankruptcy

Bankruptcies filed under Chapter 7 of the Bankruptcy Code are liquidation bankruptcies. Any assets that are not protected by bankruptcy exemptions are used to repay the person’s unsecured debts. However, most Chapter 7 bankruptcy cases filed by individuals do not result in the loss of property. However, the risk of property loss exists whenever a person files a Chapter 7 case, especially if the person does not carefully review bankruptcy exemptions before filing the Chapter 7 case.

Chapter 7 bankruptcy cases are restricted to businesses, individuals whose debts are primarily business debts, and individuals who meet income requirements. You cannot qualify for a bankruptcy discharge (debt forgiveness) in Chapter 7 unless you meet the income requirements.

Chapter 7 income requirements do not apply to people who have debts that are mostly related to a business, such as co-signed business loans, sole proprietor debts, and personal guarantees for business debts. The income requirements do not apply to a business Chapter 7. When a business files Chapter 7, the business is closed and liquidated.

If you’d like to understand it from the perspective of someone who has gone through the Chapter 7 bankruptcy process, John from Ascend actually recently filed Chapter 7 bankruptcy and created a whole bankruptcy experience article series to provide an in depth view of his bankruptcy filing experience from research to the forgiveness of his debts.

What is a Chapter 13 Bankruptcy

A Chapter 13 bankruptcy case gives debtors the ability to restructure their debts into a repayment plan. Chapter 13 is limited to individuals who have a steady income. Self-employed individuals and people who earn income from a business can file under Chapter 13. However, businesses cannot file Chapter 13. Chapter 11 is designed for businesses that need to restructure their debts through bankruptcy.

Most Chapter 13 plans are for a term of 60 months. However, if a debtor’s income is below the median income for their state, the debtor may propose a 36-month Chapter 13 plan. The amount of a Chapter 13 plan depends on numerous factors, including the person’s income, expenses, debts, and assets. In some cases, recent financial transactions can also impact the amount of a Chapter 13 plan.

Why Is It Important To Understand the Differences?

It’s extremely important to understand the differences between Chapter 7 and Chapter 13 bankruptcy because there may be unintended consequences.

We speak with many individuals who were not happy about being in a Chapter 13 bankruptcy.

Many felt that there was not a proper explanation of the differences.

Many people we speak with may not have realized that:

• Many bankruptcy lawyers provide payments plans for a Chapter 7 bankruptcy.
• Chapter 13 bankruptcy is often much more expensive.
• You can often keep your house and vehicle when filing a Chapter 7 bankruptcy.

One article by ProRepublica covering why the bankruptcy system is failing black Americans talks about this issue where someone has filed Chapter 13 bankruptcy 20 times over their lifetimes.

Check out this YouTube videos, where  I explain how an individual I spoke with unfortunately had paid a lot of money in a Chapter 13 bankruptcy before it got dismissed, instead of saving up the funds to pay a Chapter 7 attorney fee in full.

Cost Differences Between Chapter 7 and Chapter 13 Bankruptcy

You may be wondering how to compare Chapter 7 vs Chapter 13 head to head based on your specific income and expenses. Check out the Chapter 7 vs Chapter 13 calculator below that does the following:

• Estimates Chapter 7 Qualification
• Provides estimated Chapter 13 plan payment
• Provides cost and fees estimates for Chapter 7 and Chapter 13
• Compares the pros and cons of Chapter 7 and Chapter 13
• Allows you to compare other alternative options such as debt management, debt settlement, and debt payoff planning
• Uses your zip code to provide specific information for your county and state

Why You May Choose Chapter 13 Bankruptcy Over Chapter 7 Bankruptcy

Let’s cover a few reasons why you may choose a Chapter 13 bankruptcy over a Chapter 7 bankruptcy.

You Can Keep Your Assets:

If you were to file for Chapter 7 bankruptcy, you would have to submit all of your assets over to the bank trustee. Once you have done this, the trustee gets to decide what happens with the assets. If it is valuable enough to sell, they will do so to help pay off your debt. Even if it isn’t, there is a chance you would have to ‘purchase’ the asset back from the trustee. With Chapter 13 bankruptcy, the bank trustee does not have the power to liquidate your assets to pay down your debt. Instead, they simply facilitate and enforce the creation and fulfillment of your new debt payoff schedule.

You Are Not Eligible For Chapter 7 Bankruptcy:

There are some pretty stringent income requirements and qualifications when it comes to filing for bankruptcy. Oftentimes, there is a chance that you do not qualify for Chapter 7 bankruptcy. This can occur for several reasons, but, whatever the case may be, you may still be eligible for Chapter 13 bankruptcy.

Protect Your Co-debtor:

When you file for bankruptcy, the court places you under an automatic stay, which means your creditors can no longer pursue you for the debts that you owe. While this is terrific news for you, it may mean trouble if you have a codebtor. A codebtor is someone who owes a debt alongside you for various reasons. A couple of examples of a codebtor include someone who has cosigned a loan for you or a spouse who is not filing for bankruptcy alongside you. In Chapter 7 bankruptcy, your codebtor is not protected under the automatic stay. This means that the creditors may stop pursuing you, but they will start pursuing them. If you want to protect that from happening, then consider filing for a Chapter 13 bankruptcy. There is a specific ‘codebtor automatic stay’ that applies. This prevents creditors from pursuing your codebtors for payment.

Pay Debt Out Over Time:

If you are able to make some payments on your debts, just not full payments, then Chapter 13 may be best for you. The goal of Chapter 13 bankruptcy is to spread out your payments over an extended period of time so that you can make your payments every month.

Pros and Cons of Chapter 7 Bankruptcy

There are several pros and cons of Chapter 7 bankruptcy that individuals should consider before filing under Chapter 7.

If helpful, we wrote an entire article that goes into more details about the bankruptcy pros and cons.

Pros

1. Chapter 7 can be a quick way to get out of debt. Most no-asset Chapter 7 cases are discharged and closed in four to six months after filing.
2. Debtors are not required to repay any portion of discharged unsecured debts.
3. A debtor can get rid of secured debt by surrendering the collateral to the creditor. It does not matter if the property is worth less than is owed on the secured lien. The creditor cannot try to collect the remaining amount owed.
4. The attorneys’ fees for filing a Chapter 7 case are typically about one-half the amount of a Chapter 13 case.

Cons

1. Negative credit report impact. Your credit score may go up or down.
2. Attorney and filing fees
3. The Chapter 7 trustee can sell a property that is not protected by bankruptcy exemptions.
4. The Chapter 7 case does not help a person keep his car or home if he cannot afford the payments.
5. Some debts are not discharged in bankruptcy, so the debtor still owe those debts after the case is closed. Non-dischargeable debts include alimony, student loans, most tax debts, and child support.

Pros and Cons of Chapter 13 Bankruptcy

Chapter 13 bankruptcy cases also have several pros and cons to consider. Some of the pros and cons of Chapter 13 bankruptcy cases include.

Pros

1. Chapter 13 bankruptcy cases can stop foreclosures and repossessions. A debtor can repay past-due mortgage payments and include car payments in a Chapter 13 repayment plan.
2. Attorneys’ fees are higher for Chapter 13 cases, but most attorneys include their fees or a portion of their fees in the Chapter 13 plan.
3. Most debtors in Chapter 13 are committed to a 60-payment Chapter 13 plan.
4. A debtor cannot sell assets or incur debt without court approval during the Chapter 13 plan.
5. Old tax debts and past-due support payments can be included in a Chapter 13 plan.
6. Filing Chapter 13 can protect assets that might be at risk of liquidation in Chapter 7. However, the Chapter 13 plan payment increases slightly because of the non-exempt equity in an asset.

Cons

1. Negative Credit Score Impact
2. Attorney fees are often much higher than Chapter 7 attorney fees
3. Low payment flexibility
4. The length if time is 3 or 5 years, which is longer than a Chapter 7 bankruptcy.

Factors to Consider When Deciding Between A Chapter 7 and 13 Bankruptcy

There are numerous things you may want to consider when making the decision between a Chapter 17 and Chapter 13.

Income Requirements

Deciding between Chapter 7 and Chapter 13 bankruptcies can be challenging. One of the first factors to consider is your income. You must meet the income requirement for the Chapter 7 Means Test to receive a bankruptcy discharge in Chapter 7.  You may be wondering how to pass the means test for Chapter 7.

If your median income is above your state’s median income and you have enough disposable income to pay a minimum amount to your unsecured creditors, you need to file under Chapter 13.

Equity in Assets and Property

Bankruptcy exemptions only protect a certain amount of equity in your assets. If your assets are worth more than the allowed bankruptcy exemptions, you could lose that property in Chapter 7. However, you could keep your property in Chapter 13 by paying a slightly higher repayment plan.

Repossessions and Foreclosures

If you are behind on your mortgage payments, Chapter 7 probably will not help. You would need to catch up on your mortgage payments, refinance the mortgage loan, or apply for a mortgage modification. However, Chapter 13 stops foreclosure by allowing you to catch up on the mortgage payments through your bankruptcy repayment plan.

Likewise, if you cannot afford your car payments, Chapter 7 may not help. The lender will want full payment of the past-due payments or payment of the loan in full. If the car is worth less than is owed on the car, you may be able to redeem the car (pay what the car is worth) to satisfy the debt, but you must pay the amount all at one time.

In a Chapter 13 case, you can spread out car payments over several years to lower the payment. In some cases, you can “cram down” the amount owed to pay off the car loan if the car is worth less than the loan payoff, and you owned the vehicle for at least 910 days before filing Chapter 13.

Chapter 7 Bankruptcy Process

To begin the Chapter 7 bankruptcy process, the first step is for the debtor to file a petition with the bankruptcy court nearest to them or their place of business. They must also submit a variety of personal finance documents to the court, such as statements in regards to financial affairs and unexpired leases. Additionally, a copy of their tax return from the recent tax year and any returns during the duration of the case are to be presented to the assigned case trustee.

For individuals specifically, there are additional documents to file. This includes a certificate of credit counseling, a copy of any debt repayment plan from credit counseling, and proof of employer payment from 60 days prior to filing (the complete list of documents required here).

Before filing, a variety of fees for the filing process must be paid to the bankruptcy court. If needed, individual debtors can pay these in up to four installments, though there are exceptions to that limit.

In order to have completed the Official Bankruptcy Forms, debtors must provide the following information:

• A list of all creditors and the amount and nature of their claims;
• The source, amount, and frequency of the debtor’s income;
• A list of all of the debtor’s property; and
• A detailed list of the debtor’s monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.

Married individuals, regardless of who is the one filing, must include this information for their spouse as well. This is only done so that the bankruptcy court can properly evaluate the financial situation of the household. You may submit a schedule of properties from which you are exempt; these corresponding properties are determined and protected by federal or state bankruptcy laws. To know what is exempt in your state, it is best to contact a bankruptcy attorney.

When filing for Chapter 7, there are a few things to remember. The action of filing will automatically place a stop on most creditors and collection agencies. When someone files, a bankruptcy clerk will give notice to all creditors provided by the debtor of their filing. Additionally, between 21 and 40 days after filing, a meeting will be held by the case trustee between the debtor who will be under oath and the creditor. During this meeting, the case trustee and creditors will ask questions, in which cooperation is key. Things such as financial documents may be requested. One of the goals of the meeting is to ensure that the debtor is fully aware of the process and results of Chapter 7 as well as the alternatives. The Bankruptcy Code does allow for Chapter 7 bankruptcy cases to be converted to Chapter 11, 12, 13 as long as they are still eligible.

Understanding a Chapter 7 Discharge

A Chapter 7 discharge only applies to individuals filing for Chapter 7. When granted a Chapter 7 discharge, responsibility for your debts is removed and creditors can no longer take action towards your debt. According to the United States Courts, apart from the exceptions, individuals receive this discharge 99 percent of the time. This usually occurs within 60 to 90 days after the first meeting set with creditors.

Concerning the probability of being denied a discharge, the chances are few and far between. However, the cases for such an occurrence are all listed here. These reasons include failing to keep adequate financial records or failing to follow an order from the bankruptcy court.

In some cases, even after a discharge is given, creditors may come after underlying debt by taking away property. If the debtor wishes to prevent this, they must “reaffirm” their debt. In other words, they have to make an agreement to pay all or some of the debts owed to the creditor that would have otherwise been waived through the process of bankruptcy. As long as the debtor continues to pay the debt, they cannot take away property. Reaffirming must take place before the discharge is granted by submitting a written agreement to the court. Within this agreement, specific disclosures are required to be filed, including how much debt is being reaffirmed as well as proof that the debtor’s current income is sufficient to pay the debt. If this is not the case, the court may not approve the reaffirmation agreement. However, if the debtor is not represented by an attorney, the bankruptcy judge is required to approve the agreement. With an attorney, they will be required to confirm that reaffirmation will not bring any harm to the debtor. Most importantly, the debtor must be paying the debts voluntarily in any case.

Although most debts are discharged through Chapter 7, there are a few situations in which this is not possible. These cases include debts from educational loans and personal injury from driving under the influence. Certain debts are guaranteed to be discharged unless a creditor files to have the debts made dischargeable.

The court reserves the right to remove a discharge by request of the trustee, creditor, or a federal trustee in defined instances, such as the discharge having been obtained through fraud.

Chapter 13 Bankruptcy Process

The Chapter 13 process starts by filing at a bankruptcy court in the individual’s area of residence. Excluding any exceptions, the following information is also required to be given to the court at the time of filing: “(1) schedules of assets and liabilities; (2) a schedule of current income and expenditures; (3) a schedule of executory contracts and unexpired leases; and (4) a statement of financial affairs. Fed. R. Bankr. P. 1007(b)” (US Courts). Additionally, the individual must file proof of credit counseling and a copy of a debt repayment plan, if any was made, proof of payment from employers, if any was received within 60 days prior to filing, a statement of monthly net income, including information about whether your income or expenses are might increase, and a record of the individual’s interest in federal or state education or tuition accounts, if any. The Chapter 13 trustee must receive copies of any of the debtor’s tax returns from the “most recent tax year”, as well as a copy of any returns made during the time of bankruptcy. Married individuals can either file a joint or individual petition.

Chapter 13 Bankruptcy Costs

There is a $235 case filing fee as well as a $75 administrative fee that is to be paid to a court clerk upon filing. However, with permission from the court, both of these payments can be made in up to 4 installments that must be made within 120 days of filing. This 120-day time frame can be extended by the court as long as it is paid before 180 days have passed. When a joint petition is filed, the fee is only charged once. Dismissal of the case may result in individuals who fail to pay these fees.

According to the US Courts, in order to properly complete the Official Bankruptcy Forms, the debtor must provide the following information:

• A list of all creditors and the amounts and nature of their claims;
• The source, amount, and frequency of the debtor’s income;
• A list of all of the debtor’s property; and
• A detailed list of the debtor’s monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.

For married individuals, the individual who is filing must present their spouse’s information regardless of whether their spouse is filing or they are filing a joint petition. This is required because the information is used by the court to evaluate the household’s financial situation.

How Chapter 13 Trustee Works

Once an individual has filed for Chapter 13, they are assigned an impartial Chapter 13 trustee who will “administer” the case for them. The trustee will both evaluate the case and collect payments from the debtor to give to the creditor.

Filing places a hold on most collection actions for both the debtor and their property. There are exceptions to what this does not apply to, and the holder may only be effective for a short period of time. As long as this hold is in place, creditors may not initiate lawsuits, request payments, or make phone calls to the debtor. The bankruptcy clerk will give notice of a debtor has filed for bankruptcy to all the creditors that were listed when they filed. Chapter 13 also places a hold on the ability creditors have to collect consumer debt from “co-debtors”. These are debts that were obtained from loans for personal or household use.

As previously mentioned, filing for Chapter 13 may prevent a home from being foreclosed; in fact, as soon as an individual begins the filing process, an automatic stay is applied to any foreclosure proceeding. Payments that were past due until that point can be brought back “over a reasonable period of time”. However, foreclosure can still happen if the mortgage company completes the foreclosure sale before the individual has filed for a petition or if the debtor fails to make their mortgage payments after filing.

Chapter 13 Bankruptcy Timeline

21 to 50 days following the debtor filing for bankruptcy, a Chapter 13 trustee will hold a meeting for creditors. During this time, the debtor is placed under oath, and both the creditor and debtor may ask each other questions. It is required that debtor attend this meeting and answer any questions that creditors may have concerning “his or her financial affairs and the proposed terms of the plan” (US Courts). If a married couple has filed a joint petition, they are both required to attend the meeting. Bankruptcy judges are not allowed to attend this meeting to maintain their “independent judgment”. Any problems with the plan are usually resolved during or shortly after the meeting and things typically run smoothly if the petition and plan are completed properly, with the trustee having been consulted before the meeting.

Under Chapter 13, unsecured creditors may file their claims within 90 days from the first set meeting date with creditors; a governmental unit has 180 days to do so.

Following the meeting with creditors, the debtor, their trustee, and any creditors who choose to do so come to court for a hearing on the debtor’s repayment plan.

The Chapter 13 Bankruptcy Confirmation Hearing

Within 40 days of the meeting with creditors, the bankruptcy court must hold a confirmation hearing to determine whether the plan abides by the Bankruptcy Code and is feasible for the debtor. Creditors will receive a 28-day notice of this confirmation hearing and may object to it. Common reasons for objection are that the payment they would receive under this plan is less than what they would receive through liquidation under Chapter 7. Another reason is that the plan does not fully distribute the debtor’s disposable income over the course of the repayment period.

As soon as the plan is confirmed by the court, the Chapter 13 trustee may start the distribution of funds to creditors. If the plan is rejected, the debtor may refile a revised plan or may convert it to a Chapter 7 liquidation case. If the court rejects both the original and revised plan, dismissing the case, the trustee has permission from the court to use any funds needed for costs but they must return all the remaining funds to the debtor.

Circumstances change a debtor’s ability to complete payments under their plan. This can result from a creditor’s objection to the plan or from the debtor’s failure to include a full list of their creditors. If this occurs, the plan can be modified before or after filing. Request for modification can be made by the debtor, trustee, or an unsecured creditor.

How You May Make the Chapter 13 Plan Work

A confirmed repayment plan binds both the debtor and their creditors. As soon as the plan is approved by the court, it is the responsibility of the debtor to make sure the plan succeeds. Meaning they must make direct payments to the trustee or through payroll deduction. It is crucial that the individual does not obtain any new debt because it could skew their ability to complete the repayment plan successfully. Concerning making payments through payroll deductions, this method is a good way of making sure payments are made on time.

There are certain tips and tricks that you can employ to help you get your Chapter 13 bankruptcy plan. These include: 1) Creating a Chapter 13 budget. 2) Avoiding incurring new debt and 3) Being communicative with your Chapter 13 bankruptcy attorney.

In any case in which payments are not made on time, the case may receive a dismissal or be liquidated under Chapter 7 bankruptcy. This may also occur if the debtor fails to make any domestic support payments or required payment for taxes after filing.

The Chapter 13 Bankruptcy Discharge

As the scope of Chapter 13 discharge has recently had many changes to it, it is always best to consult a legal counsel regarding discharge prior to filing.

A debtor receives a discharge after having completed all their payments under their Chapter 13 repayment plan. They also must have completed all domestic support payments, have not received a discharge previously within a certain time frame, and completed a course on financial management. A discharge will not be officially entered by the court until following notice and a hearing, they are sure that there is no potential proceeding that might limit the individual’s bankruptcy homestead exemption.

A Chapter 13 discharge releases the debtor from all debts within the plan or “disallowed,” with few exceptions. Following a discharge, creditors who have received payments for claims either in full or in part may not take legal charge or collect from the debtor any longer.

Generally, all debts are discharged under Chapter 13 but there are exceptions. These include debts for a home mortgage, child support in arrears for Chapter 13, federal educational loans, or certain taxes. Depending on the extent to which they are paid under a Chapter 13 plan, the debtor is still responsible for these debts following a discharge. Debts for things such as fraud will be discharged unless a creditor files and prevails to have non-dischargeable.

Generally, a Chapter 13 discharge is much broader than that of Chapter 7.  Chapter 13 includes discharge from debts that would otherwise not be discharged under Chapter 7.

Alternatives to Bankruptcy

Debt settlement, debt management, and debt consolidation loans are three alternatives to bankruptcy that work for many people. Without filing bankruptcy, you can get out of debt. In some cases, you can eliminate debts for less than you owe on the debt.

Ascend wants to help you explore all your bankruptcy alternatives in addition to bankruptcy. The links above throughout this article provide additional information about Chapter 13 and Chapter 7 bankruptcy cases. You can also explore bankruptcy alternatives by using viewing different in-depth articles on our websites, such as  Debt Management vs. Debt Settlement.