Blue Bee Bankruptcy Blog

When you decide that bankruptcy might be the right solution for your financial situation, the next step is understanding which type of bankruptcy best fits your circumstances. For most individuals, this choice comes down to Chapter 7 or Chapter 13 bankruptcy.

Each type serves different purposes and has different requirements, benefits, and drawbacks.

Overview of Consumer Bankruptcy Chapters

The United States Bankruptcy Code includes several chapters, but most individuals file under either Chapter 7 or Chapter 13. These chapters are named for their location in Title 11 of the United States Code.

Chapter 7 is often called liquidation bankruptcy because it may involve selling non-exempt assets to pay creditors. However, most people who file Chapter 7 keep all their property through exemptions.

Chapter 13 is often called reorganization bankruptcy because you reorganize your debts into a repayment plan rather than liquidating assets. You make monthly payments to a trustee who distributes the money to creditors over three to five years.

Understanding the key differences between these chapters helps you determine which option makes sense for your situation.

Chapter 7 Bankruptcy Explained

Chapter 7 bankruptcy provides the quickest path to debt relief for people who qualify. If approved, most of your unsecured debts are discharged, meaning you are no longer legally obligated to pay them.

How Chapter 7 Works

When you file for Chapter 7 bankruptcy, the court appoints a bankruptcy trustee to oversee your case. The trustee reviews your financial documents, conducts your meeting of creditors, and determines whether you have any non-exempt assets that can be sold to pay creditors.

The automatic stay goes into effect immediately when you file, stopping most collection actions, lawsuits, and wage garnishments. This provides immediate relief while your case proceeds.

Most Chapter 7 cases are “no-asset” cases, meaning the debtor has no property that exceeds exemption limits. In these cases, which represent the majority of Chapter 7 filings, the trustee does not sell any property. The debtor receives a discharge of qualifying debts, typically about 90 to 120 days after filing.

Who Qualifies for Chapter 7

Not everyone can file for Chapter 7 bankruptcy. You must pass the means test, which compares your income to the median income in your state for a household of your size.

If your income is below the state median, you typically qualify for Chapter 7. If your income exceeds the median, the means test calculates your disposable income after subtracting allowed expenses. If you have little or no disposable income available to pay creditors, you may still qualify for Chapter 7.

The means test looks at your average monthly income during the six months before you file. This means a recent job loss or income reduction could help you qualify even if your current income is higher.

You also cannot have received a Chapter 7 discharge in the previous eight years or a Chapter 13 discharge in the previous six years.

What Debts Does Chapter 7 Eliminate

Chapter 7 typically eliminates most unsecured debts, including credit card balances, medical bills, personal loans, collection accounts, and past-due utility bills.

However, Chapter 7 does not eliminate certain debts. These non-dischargeable debts include most student loans, recent tax debts (generally less than three years old), child support, alimony, court-ordered restitution, debts from fraud or intentional harm, and debts you did not list in your bankruptcy paperwork.

Secured debts like mortgages and car loans are treated differently. Chapter 7 eliminates your personal liability for these debts, but the creditor’s lien remains on the property. If you want to keep the property, you typically need to continue making payments and may need to sign a reaffirmation agreement.

Property You Can Keep in Chapter 7

Bankruptcy exemptions determine what property you can keep. Federal law provides a set of exemptions, and most states have their own exemption schemes. Some states allow you to choose between federal and state exemptions, while others require you to use state exemptions.

Common exemptions include home equity up to certain limits (homestead exemption), vehicle equity up to certain limits, household goods and furnishings, clothing, tools of your trade, retirement accounts, and public benefits like Social Security.

Many states also offer a wildcard exemption that can be applied to any property. This is useful for protecting assets that do not fit other specific exemption categories.

If you own property that exceeds exemption limits, the trustee may sell it and use the proceeds to pay your creditors. However, the trustee will first deduct the costs of sale and any liens on the property. In practice, trustees only sell property when there will be meaningful funds available for creditors after these deductions.

Timeline for Chapter 7

Chapter 7 moves relatively quickly compared to other bankruptcy chapters. Most cases follow this general timeline:

You file your bankruptcy petition and schedules with the court. The automatic stay takes effect immediately.

About 20 to 40 days after filing, you attend the meeting of creditors where the trustee asks questions about your financial situation and bankruptcy paperwork.

Creditors have 60 days from the first date set for the meeting of creditors to object to the discharge of their debts or challenge your exemptions.

If no one objects and you have completed all requirements, the court issues your discharge about 90 to 120 days after you file. The trustee closes your case shortly thereafter.

The entire process typically takes three to six months from filing to discharge.

Advantages of Chapter 7

Chapter 7 offers several benefits. It provides quick debt relief, usually within a few months. It eliminates most unsecured debts completely, giving you a fresh start. Most filers keep all their property through exemptions. There are no ongoing payment obligations after your case closes.

Disadvantages of Chapter 7

Chapter 7 also has drawbacks. You may lose non-exempt property, though this is rare in practice. It remains on your credit report for 10 years. You must qualify through the means test. It does not help with secured debt arrears like past-due mortgage payments, so it offers limited help in preventing foreclosure unless you are current on payments.

Chapter 13 Bankruptcy Explained

Chapter 13 bankruptcy works differently from Chapter 7. Instead of liquidating assets, you propose a repayment plan to pay all or part of your debts over three to five years. You keep your property while making monthly payments to a trustee, who distributes the funds to creditors according to your plan.

How Chapter 13 Works

When you file for Chapter 13, you propose a repayment plan showing how you will pay your debts over the plan period. Your plan must pay certain debts in full, including priority debts like recent taxes and ongoing payments for secured debts if you want to keep the collateral.

The automatic stay takes effect when you file, stopping foreclosures, repossessions, and other collection actions. Unlike Chapter 7, the Chapter 13 automatic stay can stop actions against co-signers on your debts, providing additional protection.

The court holds a confirmation hearing where the judge decides whether to approve your plan. Creditors can object if they believe the plan is unfair or does not meet legal requirements.

Once your plan is confirmed, you make monthly payments to the trustee. The trustee deducts a fee for administering your case and distributes the remaining funds to creditors according to your plan terms.

After completing all plan payments, the court discharges your remaining eligible debts. This discharge is broader than a Chapter 7 discharge in some respects, covering certain debts that cannot be discharged in Chapter 7.

Who Should Consider Chapter 13

Chapter 13 makes sense for several situations. If you have regular income but earn too much to qualify for Chapter 7, Chapter 13 may be your only bankruptcy option.

If you are behind on mortgage or car payments and want to keep the property, Chapter 13 allows you to catch up on arrears through your repayment plan while the automatic stay prevents foreclosure or repossession.

If you have non-exempt property you want to keep, Chapter 13 lets you keep all your property by paying unsecured creditors at least as much as they would receive in Chapter 7.

If you have co-signers on your debts, the Chapter 13 co-debtor stay protects them from collection actions as long as your plan includes payments on that debt.

If you have non-dischargeable tax debts or support obligations, Chapter 13 provides a structured way to pay these debts over time while protecting you from aggressive collection efforts.

Chapter 13 Repayment Plans

Your Chapter 13 plan must follow certain rules. Priority debts like recent taxes, child support, and alimony must be paid in full through your plan. Secured debts must be paid according to the loan terms if you want to keep the collateral, or you can surrender the property and discharge the remaining debt.

Unsecured creditors receive whatever you can afford to pay based on your disposable income. The court calculates your disposable income by subtracting allowed expenses from your income. Your plan must dedicate all disposable income to plan payments.

If your income is below the state median, your plan lasts at least three years but can extend to five years if you choose. If your income exceeds the median, your plan must last five years unless you pay unsecured creditors 100% of what they are owed sooner.

The amount unsecured creditors receive depends on your income, expenses, and assets. Some debtors pay very little to unsecured creditors while others pay a significant percentage. At minimum, unsecured creditors must receive at least as much as they would in Chapter 7 after liquidation of non-exempt assets.

Property You Can Keep in Chapter 13

One significant advantage of Chapter 13 is that you keep all your property. You do not lose non-exempt assets as you might in Chapter 7. However, the value of non-exempt property affects how much you must pay unsecured creditors. Your plan must pay them at least as much as they would receive if your non-exempt assets were liquidated in Chapter 7.

Timeline for Chapter 13

Chapter 13 takes much longer than Chapter 7 because you must complete your repayment plan. The typical timeline includes:

You file your petition, schedules, and proposed repayment plan. The automatic stay takes effect immediately.

You begin making plan payments within 30 days of filing, even before the court confirms your plan.

The meeting of creditors occurs about 20 to 40 days after filing.

The confirmation hearing typically happens within 45 days of the meeting of creditors. The judge approves or denies your plan at this hearing.

You make monthly payments throughout the plan period, typically three to five years.

After completing all payments, the court issues your discharge. Any remaining balances on dischargeable debts are eliminated.

The entire process takes three to five years from filing to discharge.

Advantages of Chapter 13

Chapter 13 offers several benefits. You keep all your property. You can catch up on mortgage or car payment arrears over time. The co-debtor stay protects co-signers. You can pay non-dischargeable debts over time through your plan. The Chapter 13 discharge eliminates some debts that cannot be discharged in Chapter 7. It provides a structured path forward for people with regular income who do not qualify for Chapter 7.

Disadvantages of Chapter 13

Chapter 13 also has drawbacks. The process takes three to five years. You must make monthly payments throughout this period. If you miss payments, your case may be dismissed. You must commit all disposable income to plan payments, limiting financial flexibility. It remains on your credit report for seven years. The total amount paid to creditors is often substantial.

Key Differences Between Chapter 7 and Chapter 13

Understanding the practical differences between these chapters helps you determine which fits your situation.

Eligibility Requirements

Chapter 7 requires passing the means test based on income. Chapter 13 requires regular income to fund a repayment plan. Both have debt limits, though Chapter 7’s limits are much higher. Chapter 13 limits include $465,275 in unsecured debt and $1,395,875 in secured debt (as of recent adjustments for inflation).

Treatment of Property

Chapter 7 may require surrendering non-exempt property to the trustee for liquidation. Chapter 13 lets you keep all property but requires paying unsecured creditors at least the value of non-exempt assets through your plan.

Secured Debt Arrears

Chapter 7 provides no mechanism to catch up on past-due mortgage or car payments. You must be current or negotiate with the lender. Chapter 13 allows you to cure arrears over the life of your plan while keeping the property.

Length of Process

Chapter 7 typically takes three to six months. Chapter 13 takes three to five years.

Cost

Chapter 7 filing fees are currently $338. Attorney fees typically range from $1,000 to $3,000 depending on complexity and location.

Chapter 13 filing fees are currently $313. Attorney fees typically range from $3,000 to $6,000 but are usually paid through the plan rather than upfront. You also pay the trustee a percentage of each plan payment (typically around 10%) for administering your case.

Impact on Credit

Chapter 7 remains on your credit report for 10 years. Chapter 13 remains for 7 years. However, because Chapter 13 involves repaying at least some of what you owe, some future creditors may view it more favorably than Chapter 7.

Co-Debtor Protection

Chapter 7 does not protect co-signers. They remain liable for the full debt. Chapter 13 includes a co-debtor stay that protects co-signers from collection actions as long as your plan includes payments on that debt.

Discharge Timing

Chapter 7 provides a discharge about 90 to 120 days after filing. Chapter 13 provides a discharge only after completing all plan payments, which takes three to five years.

Choosing Between Chapter 7 and Chapter 13

Several factors influence which chapter makes sense for your situation.

Your Income Level

If you pass the means test, Chapter 7 offers quicker relief. If your income is too high for Chapter 7, Chapter 13 may be your only option.

Secured Debt Arrears

If you are behind on mortgage or car payments and want to keep the property, Chapter 13 provides a way to catch up. Chapter 7 offers no help with arrears.

Non-Exempt Property

If you have significant non-exempt property you want to keep, Chapter 13 lets you keep it by paying its value to unsecured creditors over time. In Chapter 7, the trustee may sell non-exempt property.

Co-Signers

If you have co-signers you want to protect, Chapter 13 offers better protection through the co-debtor stay.

Types of Debt

If most of your debt is dischargeable in Chapter 7 (credit cards, medical bills, personal loans), Chapter 7 may eliminate your problem in a few months. If you have substantial non-dischargeable debt like recent taxes or support obligations, Chapter 13 provides a structured way to pay them.

Your Goals

If you want to eliminate debt as quickly as possible and are willing to surrender non-exempt property, Chapter 7 works well. If you want to keep specific property or need time to catch up on secured debts, Chapter 13 may better serve your needs.

Can You Convert Between Chapters?

Yes, you can convert from one chapter to another under certain circumstances. People sometimes file Chapter 7 but later convert to Chapter 13 if they discover non-exempt assets they want to protect or if creditors successfully object to the Chapter 7 discharge.

More commonly, people file Chapter 13 but convert to Chapter 7 if they cannot maintain plan payments due to job loss, illness, or other financial setbacks. You generally have the right to convert from Chapter 13 to Chapter 7 once, though you must still qualify for Chapter 7 through the means test.

Converting between chapters restarts certain timeframes and may have other consequences, so you should consult with an attorney before converting.

Other Bankruptcy Chapters

While Chapter 7 and Chapter 13 are most common for individuals, other chapters exist.

Chapter 11

Chapter 11 is primarily for businesses but is also available to individuals with debts exceeding Chapter 13 limits. Chapter 11 is complex and expensive, involving extensive court oversight. Few individuals use Chapter 11 unless their debts exceed Chapter 13 limits and they have significant assets or complex financial situations.

Chapter 12

Chapter 12 is designed specifically for family farmers and fishermen. It works similarly to Chapter 13 but has higher debt limits and more flexible terms tailored to agricultural and fishing operations.

Making Your Decision

Choosing between Chapter 7 and Chapter 13 requires careful analysis of your income, expenses, assets, debts, and goals. Many factors influence which chapter serves you best.

Consider consulting with a bankruptcy attorney who can review your specific situation. Most bankruptcy attorneys offer free initial consultations where they can assess your finances and recommend which chapter makes sense for you.

An attorney can also explain how exemption laws work in your state, estimate how much you would pay in a Chapter 13 plan, and help you understand the long-term implications of each option.

Remember that bankruptcy is a legal process with strict rules and requirements. Having professional guidance helps ensure you choose the right chapter and complete the process successfully.

Frequently Asked Questions About Bankruptcy Types

Can I choose which chapter to file, or does the court decide?

You choose which chapter to file, but you must meet the eligibility requirements for that chapter. If you file Chapter 7 but do not pass the means test, the court may dismiss your case or allow you to convert to Chapter 13. In Chapter 13, the court must confirm that your proposed plan meets legal requirements.

What happens if I cannot complete my Chapter 13 plan?

If you cannot make plan payments due to circumstances beyond your control, you may be able to modify your plan to reduce payments. If modification is not possible, you might convert to Chapter 7 if you qualify, or your case may be dismissed. Some courts allow a hardship discharge if you cannot complete the plan due to circumstances beyond your control, though this is difficult to obtain.

Can I file Chapter 7 if I previously filed Chapter 13?

Yes, but timing matters. If you received a Chapter 13 discharge, you must wait four years before filing Chapter 7. If your Chapter 13 case was dismissed without discharge, you may be able to file Chapter 7 immediately if you otherwise qualify.

Is Chapter 13 better for my credit than Chapter 7?

Both chapters significantly damage your credit. Chapter 7 remains on your credit report for 10 years while Chapter 13 remains for 7 years. However, because Chapter 13 involves repaying creditors, some future lenders may view it more favorably. The practical difference is often minimal.

Do I need an attorney for Chapter 7 or Chapter 13?

Legally, no. You can file bankruptcy without an attorney. However, bankruptcy law is complex, and mistakes can result in case dismissal, loss of property, or denial of discharge. Most people benefit significantly from hiring an experienced bankruptcy attorney. Chapter 13 is particularly complex, and very few people successfully complete it without legal representation.

Can I keep my tax refund if I file bankruptcy?

This depends on timing and exemptions. If you file Chapter 7, tax refunds you expect to receive may become part of your bankruptcy estate. Whether you can keep the refund depends on available exemptions. In Chapter 13, you typically must turn over tax refunds to the trustee as additional plan payments unless your plan already pays unsecured creditors 100% of what they are owed.

What happens to my business if I file Chapter 7 or Chapter 13?

In Chapter 7, if you operate a business, the trustee may liquidate business assets that are not exempt. Many people who file Chapter 7 lose their business. In Chapter 13, you can continue operating your business, though your business income is considered when calculating disposable income for plan payments. If you have a corporation or LLC, business debts are not discharged through your personal bankruptcy unless you personally guaranteed them.

Can I file bankruptcy more than once?

Yes, but timing restrictions apply. You must wait eight years between Chapter 7 discharges, four years between a Chapter 13 discharge and a Chapter 7 filing, six years between a Chapter 7 discharge and a Chapter 13 filing (with exceptions), and two years between Chapter 13 discharges.