What is the difference between Chapter 7 and Chapter 13?

The core difference

Chapter 7 is a liquidation: the debtor gives up any property not protected by exemptions, and most remaining debts are discharged quickly. Chapter 13 is a repayment plan: the debtor keeps everything and pays creditors over time from future income, with the rest discharged at the end.

Side by side

• Eligibility — Chapter 7 requires passing the means test. Chapter 13 requires regular income and debts below the statutory limits.
• Length — Chapter 7 usually ends about four months after filing. Chapter 13 lasts three to five years.
• Property — in Chapter 7, non-exempt property can be sold by the trustee. In Chapter 13, you keep it but must pay creditors at least its value through the plan.
• Home in foreclosure — Chapter 7 can delay a foreclosure but cannot stop it if you are behind. Chapter 13 lets you catch up on arrears over the plan.
• Car loans — Chapter 7 requires staying current or surrendering the car. Chapter 13 can spread arrears and sometimes reduce the loan to the car's value.
• Second mortgages — Chapter 13 can often strip off a fully underwater second mortgage; Chapter 7 cannot.
• Co-signers — Chapter 13 protects co-signers of consumer debts during the plan; Chapter 7 does not.
• Cost — Chapter 7: $338 filing fee and commonly $1,000–$2,500 in attorney fees. Chapter 13: $313 filing fee and commonly $3,000–$6,000 in attorney fees, much of it paid through the plan, plus the trustee's commission.
• Credit report — Chapter 7 can be reported for up to 10 years; Chapter 13 for up to 7 years.
• Refiling limits — a second Chapter 7 discharge requires 8 years after the prior Chapter 7 filing; a Chapter 13 discharge requires 4 years after a Chapter 7 filing or 2 years after a prior Chapter 13 filing.
• Success rate — nearly all Chapter 7 filers who complete the paperwork receive a discharge. Many Chapter 13 plans fail before completion, usually because payments stop.

When Chapter 7 is usually better

• Income is below the state median, or passes the means test.
• Most debts are unsecured — credit cards, medical bills, personal loans.
• Assets are mostly protected by exemptions.
• There is no mortgage or car loan in default that you need to catch up on.
• You want the fastest possible fresh start.

When Chapter 13 is usually better

• You are behind on your mortgage and want to keep your home.
• You have valuable non-exempt property, such as significant home equity.
• Your income is too high for Chapter 7.
• You owe recent taxes or support arrears that Chapter 7 would not discharge and want to pay them over time without collection.
• You have co-signers you want to protect.
• You received a Chapter 7 discharge within the past eight years.

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A simple example

A nurse earns less than the median income, rents her apartment and owes $40,000 in credit cards and medical bills. Chapter 7 will likely discharge the debt in about four months with no property lost. A contractor is four months behind on his mortgage, has $60,000 of home equity above the homestead exemption, and earns above the median. Chapter 13 lets him cure the arrears and keep the house while paying creditors what the equity is worth over five years.

Switching chapters

A Chapter 13 case can generally be converted to Chapter 7 if the plan becomes unaffordable and the debtor qualifies. A Chapter 7 case can be converted to Chapter 13 in most circumstances as well.

Other considerations

Neither chapter discharges most student loans, child support, alimony or recent taxes. Both stop wage garnishments and collection calls through the automatic stay. Both require pre-filing credit counseling and a financial education course before discharge.

Choosing the right chapter

The decision depends on income, the type of debts, the value of property, state exemptions and your goals. A bankruptcy attorney can run the means test, estimate a Chapter 13 plan payment and compare both options, usually in a free consultation.