Chapter 7 vs Chapter 13 Bankruptcy: What's the Difference?

Personal bankruptcy in the U.S. comes in two main flavors: Chapter 7 and Chapter 13. They work very differently — one erases most debt within months, the other restructures it into a multi-year repayment plan. Which one applies to you depends on income, assets, and what you're trying to protect.

Chapter 7: Liquidation Bankruptcy

Chapter 7 discharges most unsecured debt — credit cards, medical bills, personal loans — typically within 3 to 6 months. To qualify, you must pass a 'means test' showing your income is below your state's median (or that you otherwise don't have enough disposable income to repay debts). Non-exempt assets can be sold to repay creditors, but state and federal exemptions let most filers keep essentials like a modest car and household goods.

Chapter 13: Reorganization Bankruptcy

Chapter 13 is for people who don't qualify for Chapter 7 or who want to keep an asset — like a house facing foreclosure or a car facing repossession. It sets up a court-approved repayment plan lasting 3 to 5 years based on your disposable income. Remaining eligible debt is discharged once the plan is complete.

Key Differences

• Timeline: Chapter 7 takes months; Chapter 13 takes 3-5 years
• Assets: Chapter 7 may require selling non-exempt property; Chapter 13 lets you keep assets while repaying
• Eligibility: Chapter 7 requires passing the means test; Chapter 13 requires steady income to fund the plan
• Best for: Chapter 7 suits overwhelming unsecured debt with few assets; Chapter 13 suits saving a home or car from repossession
• Credit impact: Both stay on your report for years (Chapter 7 up to 10 years, Chapter 13 up to 7), but recovery speed differs

What Debts Can't Be Discharged

• Most federal and private student loans (except in cases of proven undue hardship)
• Recent income taxes
• Child support and alimony
• Criminal fines and restitution
• Debts incurred through fraud

How to Decide

• Talk to a bankruptcy attorney — many offer free initial consultations
• Credit counseling is often required by law before filing
• Think about what you most need to protect — a home, a car, or simply a clean slate