How Chapter 7 and Chapter 13 bankruptcy work differently
Chapter 7 bankruptcy wipes out most of your unsecured debts — credit cards, medical bills, personal loans — by liquidating your assets. You work with a trustee who sells what you own (with some exceptions for essential items), and the money goes to creditors. The process typically takes three to six months, and after it ends, those debts are gone.
Chapter 13 bankruptcy does not erase your debts. Instead, it creates a repayment plan lasting three to five years. You pay a portion of what you owe through monthly payments to a trustee, who distributes the money to your creditors. At the end of the plan, remaining may be able to access debts are discharged. You keep your assets, but you commit to a structured payment schedule.
The choice between them depends on your income, how much you owe, what you own, and whether you can afford a repayment plan. Neither option is "better" — they solve different problems for different situations.
Key Takeaways
- Chapter 7 erases unsecured debts but requires selling non-exempt assets, while Chapter 13 lets you keep your assets but requires a three- to five-year repayment plan.
- Chapter 7 is faster (three to six months) and leaves you debt-free sooner, but you must pass a means test based on your income to use it.
- Chapter 13 works for people with steady income who earn too much for Chapter 7 or who want to keep their home or car.
- Both types remain on your credit report for seven to ten years, but Chapter 7 typically damages your credit score more severely in the short term.
- You need to file through federal bankruptcy court and work with a court-appointed trustee in either case.
Who can file Chapter 7 and the means test
Not everyone can file Chapter 7. The court uses a means test to determine whether your income is low enough to may have access to. The test compares your household income to the median income for your state and family size. If you earn less than the median, you generally pass. If you earn more, the court looks at your expenses and calculates whether you have enough leftover money each month to pay back some of your debts.
If the means test shows you can afford payments, the court may deny your Chapter 7 petition or convert it to Chapter 13. This is why higher-income households often end up in Chapter 13 even if they prefer Chapter 7.
Chapter 13 has no means test. You can file it regardless of income, as long as your unsecured debts are below a certain threshold (the limit changes yearly but is typically around $400,000 to $500,000) and you have regular income to support a repayment plan.
What happens to your assets and home
In Chapter 7, a trustee takes control of your non-exempt property and sells it. Exempt property — items the law protects — varies by state but usually includes your primary residence (up to a certain equity amount), one vehicle, household goods, and tools needed for work. If you own a home with significant equity beyond the exemption, the trustee may sell it. If you have a car loan, the trustee typically leaves it alone because the lender has a claim to it.
In Chapter 13, you keep everything. Your home, car, and possessions stay yours throughout the repayment plan. This is the main reason people choose Chapter 13 when they have assets they want to protect — especially a house with equity or a car they need.
Both chapters can affect a mortgage or car loan. In Chapter 7, if you fall behind on payments, the lender can still foreclose or repossess. In Chapter 13, the repayment plan can include catching up on missed mortgage or car payments over the life of the plan, which stops foreclosure or repossession while you get current.
How the repayment plan works in Chapter 13
Your Chapter 13 plan lasts three to five years. The length depends on your income: if your income is below your state's median, the plan is typically three years. If it is above the median, it is usually five years. During this time, you make one monthly payment to the trustee, who divides it among your creditors according to the plan.
The plan prioritizes certain debts. Secured debts (mortgage, car loan) and priority debts (recent taxes, child support) must be paid in full. Unsecured debts (credit cards, medical bills) receive whatever is left after priority debts are covered. If there is not enough money to pay unsecured debts in full, the remaining balance is wiped out when the plan ends.
You must stick to the plan. If you miss payments or your circumstances change significantly, the trustee can ask the court to dismiss the case or convert it to Chapter 7. If you complete the plan as agreed, the court grants a discharge, and remaining may be able to access debts disappear.
Credit impact and the discharge timeline
Both Chapter 7 and Chapter 13 appear on your credit report for seven to ten years from the filing date. However, the damage to your credit score differs. Chapter 7 typically causes a sharper, more immediate drop because creditors receive little or nothing. Chapter 13 shows creditors you are repaying debts, so the credit impact is usually less severe, and your score may begin recovering sooner.
Chapter 7 discharge happens quickly — usually within three to six months. Once the court grants it, those debts are legally gone, and you can begin rebuilding credit without active debt payments.
Chapter 13 discharge takes longer because you are still paying for three to five years. However, during that time, on-time payments to the trustee demonstrate financial responsibility to future lenders. By the time your discharge arrives, your credit may already be recovering.
Costs and the role of a bankruptcy attorney
Filing bankruptcy requires paying court filing fees (currently around $300 to $400 for either chapter) and completing mandatory credit counseling and financial management courses. Most people also hire a bankruptcy attorney, whose fees vary by location and case complexity but typically range from $1,000 to $3,000 for Chapter 7 and $2,500 to $6,000 for Chapter 13.
An attorney is not legally required, but the process is complex. Courts expect you to understand the rules, and mistakes can result in dismissal or loss of protection. Many bankruptcy attorneys offer free initial consultations and can discuss payment plans or fee structures.
In Chapter 13, attorney fees are often built into your repayment plan, meaning you pay them through the trustee over time rather than upfront. This makes Chapter 13 more accessible for people without savings.
Debts that cannot be erased in either chapter
Some debts survive bankruptcy in both Chapter 7 and Chapter 13. These include student loans (with rare exceptions), recent income taxes, child support and alimony, criminal fines, and debts from fraud or willful injury. If you have significant student loan debt, bankruptcy will not eliminate it, though Chapter 13 can sometimes lower your monthly payment through the repayment plan.
Secured debts — mortgages and car loans — are not erased either. In Chapter 7, if you want to keep the house or car, you must continue paying the loan. If you stop, the lender can foreclose or repossess. In Chapter 13, the repayment plan addresses these debts and can catch you up on missed payments.
Frequently Asked Questions
Can I choose between Chapter 7 and Chapter 13, or does the court decide?
You choose which chapter to file, but the court can reject your choice. If you fail the means test for Chapter 7, the court will not grant it. If your debts exceed the Chapter 13 limits, you cannot file Chapter 13. A bankruptcy attorney can review your situation and tell you which chapters are actually available to you.
Will bankruptcy stop my creditors from calling and suing me?
Yes. Filing bankruptcy triggers an automatic stay, a court order that immediately stops collection calls, lawsuits, wage garnishment, and foreclosure or repossession. Creditors must work through the bankruptcy process instead. The stay lasts until your case is closed or dismissed.
What happens to my job if I file bankruptcy?
Employers cannot fire you for filing bankruptcy. However, bankruptcy is public record, and some employers may discover it. Government employers cannot discriminate based on bankruptcy, but private employers have more flexibility in hiring and promotion decisions, though they cannot retaliate against you for filing.
Can I file bankruptcy more than once?
Yes, but there are waiting periods. You must wait eight years between Chapter 7 filings, four years between Chapter 13 filings, and two years if you are switching from Chapter 13 to Chapter 7. These rules prevent people from repeatedly erasing debts.
What is the difference between discharge and dismissal?
Discharge means the court approved your case and erased your may be able to access debts (Chapter 7) or completed your repayment plan (Chapter 13). Dismissal means the court rejected or closed your case without granting discharge, usually because you missed payments, failed to complete required courses, or did not meet filing requirements. Dismissed cases offer no debt relief.