The core difference: liquidation versus repayment

Chapter 7 bankruptcy sells your non-exempt assets to pay creditors, then erases most remaining debts. Chapter 13 bankruptcy keeps your assets but requires you to follow a court-approved repayment plan for three to five years. The choice between them depends on your income, what you own, and whether you can afford a monthly payment plan.

Chapter 7 moves faster — typically four to six months from filing to discharge — and leaves you with a clean slate. Chapter 13 takes longer but lets you keep your home and car if you stay current on the plan payments. Neither option is "better"; each solves a different financial situation.

Key Takeaways

  • Chapter 7 erases most debts but requires you to pass a means test showing your income is below your state's median; Chapter 13 has no income limit but requires a repayment plan you can afford.
  • Chapter 7 may force you to sell a home or car with equity; Chapter 13 lets you keep both if you make the monthly plan payments.
  • Chapter 7 takes four to six months; Chapter 13 takes three to five years, during which creditors cannot contact you or take action.
  • Both stop collection calls and lawsuits when ready, but Chapter 13 is the only option if you earn too much for Chapter 7 or have significant assets you want to keep.

Chapter 7: Who qualifies and what happens to your property

To file Chapter 7, you must pass the means test, which compares your household income to your state's median income for a family your size. If your income is below the median, you pass automatically. If it is above, the test subtracts allowed expenses (housing, food, utilities, transportation) from your income; if what remains is too low to fund a repayment plan, you still pass.

Once you file, a trustee is assigned to your case. The trustee's job is to find and sell assets you own outright or own with significant equity — a second car, a vacation home, jewelry, or a tax refund. Your primary residence, primary vehicle, and basic household goods are usually protected by exemptions, which vary by state. Some states let you protect up to $25,000 in home equity; others protect much less. A bankruptcy attorney in your state can tell you exactly what you would keep.

After the trustee sells what can be sold, the money goes to creditors. Most remaining debts — credit cards, medical bills, personal loans — are erased. Some debts cannot be erased: child support, alimony, recent taxes, and student loans (with rare exceptions). You walk out with no repayment obligation, but your credit report shows the bankruptcy for ten years.

Chapter 13: How the repayment plan works and who needs it

Chapter 13 requires a monthly payment to the court for three to five years. The court calculates how much you can afford based on your income and expenses, then divides that amount among your creditors according to a priority system. Secured debts (mortgage, car loan) get paid first; unsecured debts (credit cards, medical bills) get whatever is left. You may pay unsecured creditors only a fraction of what you owe, and the rest is erased when the plan ends.

Chapter 13 is the right choice if you earn too much to pass the Chapter 7 means test, or if you have a home or car with equity that you want to keep. It is also the tool to use if you are behind on a mortgage or car payment and want to catch up over time instead of losing the property. The moment you file, creditors must stop collection calls and cannot foreclose or repossess — as long as you make your plan payments.

If you miss a plan payment, the trustee can ask the court to dismiss your case, which means creditors can resume collection. If you have a genuine hardship — job loss, medical emergency — you can ask the court to modify the plan, but you must act quickly. Staying on track for three to five years is the core requirement.

Income, assets, and which option is actually available to you

Your income determines whether Chapter 7 is even an option. If you earn above your state's median, you enter the second part of the means test. The test allows deductions for housing, food, utilities, childcare, and other necessities. If your remaining income is high enough to fund a Chapter 13 plan, the court will likely deny your Chapter 7 filing and push you toward Chapter 13 instead.

Your assets matter more in Chapter 7 than in Chapter 13. If you own a home with $80,000 in equity and your state's exemption protects only $25,000, Chapter 7 forces a sale of that home to pay creditors. Chapter 13 lets you keep it as long as you make the plan payment. Similarly, if you own two cars and only need one, Chapter 7 sells the second; Chapter 13 lets you keep both if you can afford the payments.

If you have little income and few assets, Chapter 7 is usually faster and simpler. If you have a steady income, significant home or car equity, or debts you want to repay over time, Chapter 13 is the better fit.

Timeline: How long each process takes and what happens when

Chapter 7 typically moves like this: you file, the automatic stay stops creditors when ready, you attend a brief meeting with the trustee (usually 20 to 30 minutes), the trustee sells assets over two to three months, creditors file claims, and the court issues a discharge order. The whole process is usually done in four to six months. Your credit report is updated, and you are free of the debts included in the bankruptcy.

Chapter 13 is slower. You file, the automatic stay takes effect, you propose a repayment plan, creditors have time to object, the court confirms the plan (usually within a few months), and then you make monthly payments for 36 to 60 months. Only after you complete all payments does the court issue a discharge. If you miss payments or your circumstances change, the timeline stretches or the case is dismissed.

Both processes begin with an automatic stay, which is a court order that stops collection calls, lawsuits, wage garnishment, and foreclosure when ready. This breathing room is one of the most valuable parts of bankruptcy, regardless of which chapter you file.

Debts that survive bankruptcy and debts that do not

Most debts can be erased in either Chapter 7 or Chapter 13: credit card balances, medical bills, personal loans, utility arrears, and deficiency judgments (the amount you owe after a car is repossessed and sold). In Chapter 7, these are straightforward gone. In Chapter 13, you pay what you can afford over the plan period, and the rest is erased at the end.

Some debts cannot be erased in either chapter: child support and alimony, recent income taxes (generally the last three years), student loans (except in rare hardship cases), criminal fines, and debts from fraud. If you have significant student loan debt, bankruptcy alone will not solve it, though Chapter 13 can sometimes lower your monthly payment by spreading other debts over the plan period and freeing up cash flow.

A few debts are treated differently in Chapter 13. If you are behind on a mortgage, Chapter 13 lets you catch up the arrears through the plan — you do not have to pay the full amount when ready, and the lender cannot foreclose as long as you stay current on the plan. This is called a cram-down for car loans: if you owe more than the car is worth, Chapter 13 can reduce the loan balance to the car's actual value.

Cost, credit impact, and what comes after discharge

Filing fees are set by the federal court and are the same regardless of which chapter you choose — currently around $300 to $350. Attorney fees vary by location and complexity but typically range from $1,000 to $3,000 for Chapter 7 and $2,500 to $6,000 for Chapter 13 (since the attorney must draft and defend a repayment plan). Many bankruptcy attorneys offer payment plans, and some courts allow fee waivers if you cannot afford to pay.

Both Chapter 7 and Chapter 13 damage your credit score when ready and remain on your credit report for seven to ten years. Chapter 7 stays for ten years; Chapter 13 stays for seven years from the filing date. However, your score can begin recovering within a year or two if you rebuild with a secured credit card or become an authorized user on someone else's account. Many people find their score is actually higher two years after discharge than it was before filing, because the debts are gone and the payment history is clean.

After discharge, you are free to borrow again, but lenders will see the bankruptcy. Mortgage lenders typically require two years after Chapter 7 discharge or one year after Chapter 13 discharge before you can refinance. Some credit cards and auto loans are available sooner, though at higher interest rates. The bankruptcy itself becomes less relevant over time; what matters more after a few years is whether you have paid your bills on time since discharge.

Frequently Asked Questions

Can I choose Chapter 7 if I want to, or does the court decide?

The court decides if you earn too much. If your income is above your state's median, the means test determines whether you can file Chapter 7 or must file Chapter 13. If the test shows you have enough income to fund a repayment plan, the court will deny Chapter 7 and require Chapter 13 instead. If you pass the means test, you can choose either chapter.

What happens to my house in Chapter 7 if I still owe the mortgage?

If you are current on the mortgage and your home equity is protected by exemptions, you keep the house and keep paying the mortgage. If you have equity beyond what your state exempts, the trustee may force a sale. If you are behind on payments, the lender can foreclose after the bankruptcy ends unless you file Chapter 13 and catch up through the plan.

Can I file Chapter 13 if I do not have a steady income?

Chapter 13 requires that you have regular income to make plan payments. If you are unemployed or your income is too irregular to commit to a monthly payment, Chapter 13 is not realistic. You would need to file Chapter 7 instead, or wait until your income stabilizes.

Will bankruptcy stop my wage garnishment?

Yes. The automatic stay stops wage garnishment the moment you file, whether Chapter 7 or Chapter 13. If a creditor tries to garnish your wages after you file, you can report it to the court and the garnishment is reversed. Child support and tax garnishments are exceptions and can continue.

How much does my credit score drop after filing?

The drop depends on your starting score. Someone with a 750 score may drop 130 to 200 points; someone with a 650 score may drop 50 to 100 points. The lower your score before filing, the smaller the drop. Most people see significant recovery within 12 to 24 months if they rebuild with on-time payments.