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.

Updated June 18, 2020

Once you've decided that bankruptcy is the right solution for your financial situation, you will need to decide which type of bankruptcy is most beneficial.

If you are an individual or a small business owner, then your most obvious choices are Chapter 7 "liquidation" bankruptcy or Chapter 13 "wage earners" or "reorganization" bankruptcy.

We'll go over the pros and cons of each, the eligibility rules, and give you some information to help decide which would be best for you in your financial situation.

There are a select few other types of bankruptcies that are available under certain circumstances, and we will touch on those as well.

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 try to sell any significant nonexempt property in order 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.
Property: Many Chapter 7 debtors keep all or most of their property. Petitioners with significant equity or assets that are not exempt by law could lose them to satisfy some debts. Property: No property is liquidated under a Chapter 13 bankruptcy.
Your Income: Some high-income earners won't be eligible for Chapter 7. Your Income: Chapter 13 requires a regular income for the monthly payment.
Homeowners/Foreclosures: Chapter 7 can temporarily stop foreclosure, but unless you can get current on your mortgage, the foreclosure will eventually continue. Homeowners/Foreclosures: Chapter 13 can stop a foreclosure and you can make up past due mortgage payments through your repayment plan.
Eligibility: Chapter 7 is available to those whose income is less than the median of their state, or those who can pass the means test. Eligibility: Chapter 13 has no income requirement, but unsecured debt must be below $419,275 and secured debt below $1,257,850 (as of April 1, 2019).
Filing Complexity: Filing for Chapter 7 involves preparing a large set of forms and navigating some tricky legal issues, but simple cases can be done pro se - that is, without hiring an attorney.

See: How to File for Chapter 7 Bankruptcy
Filing Complexity: Chapter 13 bankruptcy involves submitting a repayment plan to the court, and will almost always require hiring an attorney to complete successfully.

See: How to File for Chapter 13 Bankruptcy

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, Chapter 7 might be costly if you own a lot of assets. By contrast, Chapter 13 bankruptcy allows you to keep all of your property in exchange for paying back a portion or all of your debts through your 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. As a matter of fact, this is the most common bankruptcy case, 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 may lose the home in a Chapter 7 bankruptcy. Because the homeowner will only be able to keep the home in Chapter 13 bankruptcy if he or she has enough income to fund a repayment plan, it’s unlikely Chapter 13 will be available to an unemployed homeowner.

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

For homeowners who have fallen behind on mortgage payments, Chapter 13 offers a way to catch up or "cure" past due mortgage payments while simultaneously eliminating some portion of dischargeable debt. Filers can save the home from foreclosure and get rid of a lot of credit card debt, medical debt, and possibly even second and third mortgages or HELOCs. Chapter 7 bankruptcy does not provide a way for homeowners 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 Chapter 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 median, you must complete the rest of the form and take into account certain expenses to determine if your disposable income is low enough to file for Chapter 7 bankruptcy.

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 $1,257,850 in secured debts and $419,275 in unsecured debts for cases filed before or after April 1, 2019).

To learn more, see 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

This article is intended to give a brief overview of the options in bankruptcy. It doesn't cover all the issues you might encounter or discuss any particular issue in depth. Before proceeding with bankruptcy, the best practice is to review your particular case with a knowledgeable bankruptcy attorney.

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