Chapter 7 vs. Chapter 13: Which Bankruptcy Option Is Best for You?

Chapter 7 bankruptcy is faster and cheaper than Chapter 13 bankruptcy, but it’s not the best option for everyone.
Sean PylesOct 7, 2021

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Bankruptcy is one of the fastest and most effective ways to find debt relief. Most consumers who follow this path will file for Chapter 7 bankruptcy or Chapter 13 bankruptcy. Which is best depends on the individual's assets and financial goals.

To help you understand the difference between Chapter 7 and Chapter 13 bankruptcy, here’s a breakdown of each type and whom they’re best for. Regardless of which you might choose, bankruptcy may be the best option if:

  • Your monthly consumer debt payments are greater than 50% of your monthly take-home pay.

  • You’re facing lawsuits from creditors.

  • You see no way to pay off your debt within five years.

What’s the difference between Chapter 7 and Chapter 13 bankruptcy?

The main differences of Chapter 7 vs. Chapter 13 bankruptcy are the eligibility requirements, how debts are resolved and the time frame.

Check out this table to get an understanding at a glance:

Chapter 7

Chapter 13

Form of bankruptcy: Liquidation.

Form of bankruptcy: Reorganization.

Eligibility:

  • You must pass the means test, which looks at your income, expenses and family size.

  • Cannot have had a previous Chapter 7 discharge in the past eight years or a Chapter 13 in the past six years.

  • Cannot have filed a bankruptcy petition (Chapter 7 or 13) in the previous 180 days that was dismissed for certain reasons, such as failing to appear in court or comply with court orders.

Eligibility:

  • Unsecured debt cannot exceed $419,275, and secured debt cannot exceed $1,257,850.

  • Must have regular income and be current on tax filings.

  • Cannot have had a Chapter 13 filing in the past two years or Chapter 7 in the past four years.

  • Cannot have filed a bankruptcy petition (7 or 13) in the previous 180 days that was dismissed for certain reasons, such as failing to appear or comply with court orders.

How long it takes to achieve a discharge: Usually under six months.

How long it takes to achieve a discharge: Usually three to five years, depending on the repayment plan.

Mark on credit report: Remains on your credit report for 10 years from filing date.

Mark on credit report: Remains on your credit report for 7 years from filing date.

Benefits:

  • One of the fastest routes to resolve overwhelming debt.

  • Filing a bankruptcy petition halts collection efforts and legal action from creditors.

Benefits:

  • Can help you resolve your debts while retaining certain assets or getting caught up on secured debts, like an auto loan or mortgage.

  • Filing a bankruptcy petition halts collection efforts and legal action from creditors.

Drawbacks:

  • Though rare, the trustee can sell nonexempt property.

  • Generally for unsecured debt; does not protect from foreclosure or repossession.

Drawbacks:

  • The length and cost of the repayment plan is challenging for many filers.

Which is better: Chapter 7 or Chapter 13?

Which form of bankruptcy is best for you depends on your financial situation and goals.

To determine whether Chapter 7 or Chapter 13 bankruptcy is best for you, consult with a bankruptcy attorney. You’ll want to ensure that your problem debts can be handled by bankruptcy and that you're in a position to make the most of the fresh start that bankruptcy offers.

Most consumers opt for Chapter 7 bankruptcy, which is faster and cheaper than Chapter 13. The vast majority of filers qualify for Chapter 7 after taking the means test, which analyzes income, expenses and family size to determine eligibility. Chapter 7 bankruptcy discharges, or erases, eligible debts such as credit card bills, medical debt and personal loans. But other debts, like student loans and taxes, typically aren’t eligible. And Chapter 7 doesn’t offer a route to get caught up on secured loan payments, like a mortgage or auto loan, and it doesn’t protect those assets from foreclosure or repossession.

In some instances, a bankruptcy trustee — an administrator who works with the bankruptcy courts to represent the debtor's estate — may sell nonexempt items, meaning belongings that are not protected during bankruptcy. Nonexempt items vary according to state law.

Chapter 13 bankruptcy may be better for those who don’t qualify for a Chapter 7 filing, for instance, if their income is too high. And some who qualify for Chapter 7 may still choose to file for Chapter 13 because they want to retain certain assets or get caught up on their mortgage payments. However, Chapter 13 repayment plans are challenging: All disposable income after certain allowances has to be directed toward repaying debt over three to five years.

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