Which Type of Bankruptcy Should You File? Chapter 7 vs. 13

If you're thinking about bankruptcy, you'll need to consider which type is right for you. Here are the highlights.

By , Attorney · University of the Pacific McGeorge School of Law

If you're wondering whether bankruptcy is the right solution for your financial situation, you'll want to explore the two types of bankruptcy most filers choose between.

People considering filing an individual bankruptcy most often file either Chapter 7 "liquidation" bankruptcy or Chapter 13 "wage-earners" or "reorganization" bankruptcy. We'll go over the pros and cons of these two commonly filed bankruptcy chapters and the eligibility rules to help you decide which would be best in your financial situation.

Small business owners should also consider the effect of bankruptcy on the business. Here's where you'll find more on small business bankruptcy strategy.

Chapter 7 vs. Chapter 13

To get started, here's a look at the highlights of both Chapter 7 and Chapter 13 bankruptcy:

Chapter 7 Bankruptcy

Chapter 13 Bankruptcy

Basics: A Chapter 7 bankruptcy will discharge most types of unsecured debt. The trustee will sell nonexempt property you can't protect with an exemption to repay your creditors. Basics: In Chapter 13 bankruptcy, you repay your creditors (some in full, some in part) through a Chapter 13 repayment plan.
Time Frame: A typical Chapter 7 bankruptcy case takes three to four months to complete. Time Frame: The Chapter 13 payment plan lasts three or five years (depending on your income). At the end, most of your unsecured debt balances will be discharged in Chapter 13.
Property: Many Chapter 7 debtors keep all or most of their property using bankruptcy exemptions. Petitioners with significant nonexempt equity or assets could lose them to satisfy some debts. Property: Property isn't sold in a Chapter 13 bankruptcy. You pay the value of nonexempt property or assets you can't protect with a bankruptcy exemption through the repayment plan.
Your Income: Some high-income earners won't be eligible for Chapter 7. Your Income: Chapter 13 requires sufficient regular income to pay the amounts required in the monthly payment.
Homeowners/Foreclosures: Chapter 7 can temporarily stop foreclosure, but the foreclosure will eventually continue unless you can get current on your mortgage. Homeowners/Foreclosures: Chapter 13 can stop a foreclosure, and you can make up past due mortgage payments through the repayment plan and keep the property.
Eligibility: Chapter 7 is available to those whose income is less than their state's median or who can pass the means test. Eligibility: Chapter 13 has no income requirement, but unsecured debt must be below $465,275 and secured debt below $1,395,875 (for cases filed between April 1, 2022, and March 31, 2025).
Filing Complexity: Filing for Chapter 7 involves preparing a large set of forms and navigating tricky legal issues, but simple cases that don't involve much income, debt, or property can be done "pro see" without hiring an attorney.

See: How to File for Chapter 7 Bankruptcy
Filing Complexity: Chapter 13 bankruptcy involves proposing a repayment plan to the court. Drafting a repayment plan the court will approve is complicated and almost always requires hiring an attorney to complete it successfully.

Chapter 11 and Chapter 12

Chapter 11 and Chapter 12 are similar to Chapter 13 repayment bankruptcy but designed for specific debtors.

Chapter 11 bankruptcy is another form of reorganization bankruptcy that is most often used by large businesses and corporations. Individuals can use Chapter 11 too, but it rarely makes sense for them to do so.

Chapter 12 bankruptcy is designed for farmers and fishermen. Chapter 12 repayment plans can be more flexible in Chapter 13. In addition, Chapter 12 has higher debt limits and more options for lien stripping and cramdowns on unsecured portions of secured loans.

Choosing the Right Type of Bankruptcy

Your income and assets will determine the bankruptcy chapter you file. For instance, too much income might preclude you from filing a simple Chapter 7 case. Or, if you have property you'd lose in Chapter 7 that you'd like to keep, you can protect it in Chapter 13.

In Chapter 7 bankruptcy, the bankruptcy trustee has the power to sell your nonexempt property to pay back your creditors. As a result, filers with significant luxury assets that aren't protected in Chapter 7 won't find Chapter 7 a good option. Instead, such filers will fare better in Chapter 13 bankruptcy because Chapter 13 allows filers to pay to keep nonexempt property through the repayment plan.

Further, if certain conditions are satisfied, Chapter 13 bankruptcy offers debtors additional benefits that aren't available in Chapter 7, such as the ability to:

  • save a home subject to foreclosure--or a car from repossession--by catching up on missed payments
  • reduce the principal balance of your car loan or investment property mortgage with a cramdown, or
  • eliminate your second mortgage or another unsecured junior lien through lien stripping.

Here are a few scenarios that explore which bankruptcy strategy would be best:

1. Unemployed Debtors with Few Assets – Chapter 7

In cases like this, a Chapter 7 bankruptcy is the fastest, easiest, and most effective means of getting rid of debt. This common bankruptcy case is often called a "no asset" bankruptcy.

2. Unemployed Homeowners With Significant Equity – Possibly Chapter 7

If a homeowner has a significant amount of equity in property, then Chapter 7 may or may not be the best option. If the homeowner's state exempts a generous amount of home equity, then the home may be safe. But if the state homestead exemption doesn't cover the equity, the homeowner will lose the home in Chapter 7. Because only homeowners with enough income to fund a repayment plan will be able to keep the home in Chapter 13 bankruptcy, it's unlikely Chapter 13 will be available to an unemployed homeowner.

3. Employed Homeowners Facing Mortgage Delinquency or Foreclosure – Chapter 13

Homeowners who have fallen behind on mortgage payments use Chapter 13 to catch up or "cure" past due mortgage payments. Filers can save the home from foreclosure and get rid of many debts, such as credit card balances, medical bills, and sometimes second and third mortgages or HELOCs. Chapter 7 bankruptcy doesn't offer homeowners a way to make up mortgage arrears, so it's not a good choice for delinquent homeowners who want to keep a home.

4. Wealthy Petitioners with a Large Amount of Debt - Chapter 11

Very wealthy debtors often need to file under Chapter 11 due to the debt and income limits of Chapter 7 and Chapter 13 bankruptcies.

Eligibility Requirements for Chapters 7 and 13

To qualify for Chapter 7 bankruptcy, you must pass the means test. The means test looks at your average monthly income for the six months preceding your filing date and compares it against the median income for a similar household in your state. If your income is below the state median, you automatically pass and do not have to fill out the entire form. If it is above the median, you must complete the rest of the form. You'll determine if your disposable income is low enough to file for Chapter 7 bankruptcy by deducting certain expenses.

In Chapter 13 bankruptcy, you propose a repayment plan to pay back some or all of your debts over a three to five-year period. As a result, you must have sufficient income to afford your plan payments each month. Further, to qualify for Chapter 13 bankruptcy, you can't have more than $1,395,875 in secured debts and $465,275 in unsecured debts for cases filed between April 1, 2022, and March 31, 2025).

Learn more about The Means Test in Chapter 7 Bankruptcy and Debt Limits for Chapter 13 Bankruptcy.

Should You File an Individual or Joint Bankruptcy?

If you are married, you can choose to file for bankruptcy jointly with your spouse or individually. In general, filing for bankruptcy together makes sense if you have a lot of joint debts and your state allows you to double your bankruptcy exemptions in a joint filing.

However, individual bankruptcy might be in your best interest if:

  • only one spouse has debt
  • one spouse has nonexempt separate property that may be at risk in bankruptcy (be aware that in community property states, all marital assets are considered the property of the bankruptcy estate), or
  • your state doesn't allow married couples to double their exemptions in a joint case.

To learn more, see Bankruptcy Filing Options for Married Couples.

Talk With a Bankruptcy Lawyer

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.

Updated April 22, 2022

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