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

If you're considering bankruptcy, you must decide between Chapters 7, 11, 12, and 13. 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 options available, including Chapters 7 and 13, the two types of bankruptcy most filers choose between. Chapter 7 is known as a "liquidation" bankruptcy because filers can lose property. Chapter 13 is a "wage-earners" or "reorganization" bankruptcy in which filers make monthly payments to creditors for up to five years.

This article reviews the pros and cons of these two commonly filed bankruptcy chapters, including eligibility rules, to help you decide which would be best for your financial situation. Because bankruptcy affects companies very differently than individuals, small business owners will also want to learn about small business bankruptcy strategy.

Chapter 7 vs. Chapter 13

Looking at the highlights of Chapters 7 and Chapter 13 is a great way to learn about bankruptcy differences.

Chapter 7 Bankruptcy

Chapter 13 Bankruptcy

Basics: A Chapter 7 bankruptcy discharges most types of unsecured debt. The trustee sells nonexempt property you can't protect with an exemption and uses the funds to repay creditors. Basics: In Chapter 13 bankruptcy, you repay your creditors (some in full, some in part) through a monthly 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 of the plan, most remaining 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 nonexempt property could lose it to satisfy some debts. Businesses aren't entitled to keep property using exemptions. Property: The trustee doesn't sell property in Chapter 13 bankruptcy. You pay creditors the value of the nonexempt property you can't protect with a bankruptcy exemption through the repayment plan.
Your Income: A debt discharge is available to individuals whose income is low enough to pass the means test. People whose business debts are greater than consumer obligations or with qualifying military experience are exempt from the means test. Businesses aren't required to pass the means test. Your Income: Chapter 13 requires sufficient regular income to pay the amounts required in the monthly payment. You must earn enough income to pay all required amounts through the plan.
Homeowners/Foreclosures: Chapter 7 can temporarily stop foreclosure, but the foreclosure will eventually continue unless you are current on your mortgage and can protect all home equity with a bankruptcy exemption. 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. However, nonexempt home equity must be paid through the plan.
Eligibility: Individuals and businesses can file, although businesses often don't for many reasons. Businesses aren't eligible for a debt discharge, other than sole proprietors. Previous filers must wait until sufficient time passes before filing again to receive a debt discharge. Eligibility: Only individuals and sole proprietors can file for Chapter 13, not businesses. A temporary $2.75 million debt limit exists until July 2024, then it will drop to $465,275 for unsecured debt and $1,395,875 for secured debt unless the larger debt limit is extended. Previous filers must wait until sufficient time passes before filing again to receive a debt discharge.
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 se" 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 and involve paying creditors through a repayment plan. Chapter 11 bankruptcy is most often used by large businesses and corporations. Individuals must use Chapter 11 when their debts exceed Chapter 13 debt limits. It rarely makes sense in other instances but has more options for lien stripping and cramdowns on unsecured portions of secured loans.

Chapter 12 bankruptcy is designed for farmers and fishermen. Chapter 12 repayment plans can be more flexible in Chapter 13. In addition, Chapter 12 usually 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 can 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, Chapter 7 bankruptcy is the fastest, easiest, and most effective means of eliminating debt. This common bankruptcy case is called a "no asset" bankruptcy.

2. Unemployed Homeowners With Significant Equity – Possibly Chapter 7

If a homeowner has a significant amount of equity in the property, then Chapter 7 might not be the best option. If the homeowner's state exempts a generous amount of home equity, the filer might be able to protect the home from the trustee. 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 can 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 with sufficient income to make up the deficiencies can save the home from foreclosure and eliminate many debts, such as credit card balances and medical bills. Sometimes, the filer can eliminate second, third, and other junior mortgages and 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 must 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 complete 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 exceed the Chapter 13 debt limits. The debt limits are listed in the chart above, and current amounts can be verified on the U.S. Courts Chapter 13 Bankruptcy Basics webpage.

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 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 16, 2024

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