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Chapter 7 vs Chapter 13 Bankruptcy

Dena Standley | June 19, 2024

Dena Standley
Legal Expert, Paralegal
Dena Standley, BA

Dena Standley is a seasoned paralegal with more than 20 years of experience in legal research and writing, having received a certification as a Legal Assistant/Paralegal from Southern Technical College.

Edited by Hannah Locklear

Hannah Locklear
Editor at SoloSuit
Hannah Locklear, BA

Hannah Locklear is SoloSuit’s Marketing and Impact Manager. With an educational background in Linguistics, Spanish, and International Development from Brigham Young University, Hannah has also worked as a legal support specialist for several years.

Summary: Bankruptcy allows consumers to manage overwhelming debt. A Chapter 7, sometimes called liquidation bankruptcy, uses non-exempt assets to pay as much unsecured debt as possible and then discharges the rest. Chapter 13 allows consumers to reorganize debt repayment over several years. The consumer must pay creditors the value of non-exempt assets they choose to keep.

Bankruptcy is a provision to erase burdensome, unsecured debt. It is a serious step that every consumer must carefully consider before proceeding. Depending on the type of bankruptcy you file, you may lose some of your property if its value exceeds the federal or state exemption limits. But filing for bankruptcy does not leave you destitute. Consumers can keep their source of income, home, clothing, and more up to a specific value.

For consumers who have tried every other possible means to resolve debt without success, bankruptcy may be their last option. With creditors off their backs, they can focus on rebuilding their lives and improving their credit health.

Chapters 7 and 13 bankruptcies are available to individuals and couples. This article explains how they work, the main differences, and how to use exemptions to your advantage.

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What is the difference between Chapter 7 and Chapter 13 bankruptcy?

The most notable difference between Chapter 7 and Chapter 13 is the way they work to resolve debt.

Chapter 7 bankruptcy uses liquidation. A court-appointed trustee evaluates a debtor's assets and sells (liquidates) non-exempt items. The trustee uses the proceeds to pay creditors. In most Chapter 7 bankruptcy cases, the assets available for sale are usually too little to pay all creditors. When the trustee exhausts the money, the remaining creditors forfeit their payments. The debts get discharged, and you do not have to pay anything.

If you do not have any assets, your bankruptcy case is "non-asset," meaning all your non-collateral consumer debts get discharged without making any payments.

Chapter 7 offers little leeway to keep assets you are attached to. However, if you have a non-exempt asset you treasure, you may be able to convince the trustee to take an exempt property instead. You may also try to repurchase it from them after the seizure. Or you can also use the wildcard provision to protect a beloved family heirloom.

Filers must stick to the rules to avoid dismissal.

A Chapter 13 bankruptcy works by setting up a repayment plan. It gives you more flexibility in terms of keeping your assets. Instead of liquidating the non-exempt items, consumers agree to pay their unsecured creditors the value of the non-exempt property. Let's take a look at an example.

Example: Jack owns a secondary home (which is non-exempt); instead of letting the trustee sell it—as would be the case in Chapter 7—he agrees to pay his creditors the home’s value. Jack does not have to pay upfront. The process works by setting up a payment plan spanning 36 to 60 months. If he successfully completes the program, the remaining unsecured debts get discharged at the end of that period.


Another difference is that Chapter 7 stays on your credit report longer—it lasts ten years, while Chapter 13 remains there for seven years.

The table below summarizes these and other differences.

Chapter 7 vs. Chapter 13 Bankruptcy
Chapter 7 Chapter 13
Liquidates non-exempt property to pay creditors Allows filers to keep non-exempt property as long as they pay creditors an equal amount.
Stays in credit report for ten years Stays in credit report for seven years
It does not provide a way to prevent foreclosures and repossessions. Allows consumers to make up for missed mortgage payments and other non-dischargeable debts.
Discharges debts within 3-5 months It can take up to five years, and the debtor must complete the payment plan.
A debtor must pass the means test to be eligible. Disposable income must be low enough. The filer's combined debts (secured and unsecured) must be at most $2,750,000.
Individuals and business entities can file Only individuals can file

As the table demonstrates, disposable income and exemptions significantly affect the type of bankruptcy you file.

To learn more about Chapter 7 vs Chapter 13 bankruptcy, we asked a licensed bankruptcy attorney for tips. Here’s what we learned:

How do I file for bankruptcy?

The federal government has set up a process to ensure filers understand what they are getting into by filing bankruptcy. Consumers must go through credit counseling to prepare themselves and understand which bankruptcy filing is the right choice. The process generally takes the following steps:

  1. Enroll for and complete credit counseling and a debtor's education course. Consumers must take the credit counseling course before filing for bankruptcy. After filing, but before the debts are discharged, they must take a debtor’s education course that prepares them to better deal with debt in the future. Find a list of government-approved credit counselors on the Department of Justice website.
  2. Next, filing papers should be obtained on the US Bankruptcy Court Website.
  3. You must file the papers in court. You may need to pay $338 for Chapter 7 and $313 for Chapter 13 filing fees. If the court determines that you cannot afford filing fees, they may waive the costs.
  4. The court appoints a trustee.
  5. The trustee convenes a meeting with all your creditors.
  6. You meet with the lenders. You must be honest about your financial situation under oath. You may need an attorney to help you analyze your income, family needs, and bankruptcy exemptions to avoid misrepresenting facts.
  7. The bankruptcy trustee finalizes payments to lenders. Your remaining debts are discharged.

You can only file for bankruptcy if the court has not dismissed a similar application in the six months preceding the filing.

It is the trustee’s duty to ensure that any non-exempt assets are liquidated and creditors paid in order of priority.

Which assets are exempt?

Bankruptcy should not leave consumers on the street. State and federal governments have designed exemption rules to protect the assets you need to survive. Some states allow you to choose between federal and state exemption laws. Therefore, which assets you get to keep often depends on where you live.

Some states are more generous than others. For example, someone using the Texas property exemption can keep an unlimited value in a home (homestead) that meets qualification requirements (Tex. Prop. Code §§ 41.001 – 41.0241). In contrast, federal exemptions allow only up to $27,900 in home value. New York has separate exempt homestead values for different counties.

Before filing, consumers should review their state’s list of exemptions to ensure they get the most out of the law's protections.

Below is a list of exempt assets in bankruptcy. Working with a bankruptcy attorney is advisable as some exemptions may be partial or not apply in your case.

  • Tools you need to earn a living
  • The modest car you need to drive to work
  • The house in which you live
  • Furniture and appliances you require
  • A computer that you need
  • A television
  • Wedding ring
  • Art, if it is your creation
  • A musical instrument that contributes to your earning a living
  • Non-luxury clothes

Some money you receive may also be safe:

  • Unemployment benefits
  • Wages you earn after you file
  • Alimony and child support
  • Veteran’s benefits
  • Retirement accounts
  • Social Security benefits
  • Life insurance
  • Crime victim awards

Congress enacted the Bankruptcy Code in 1978. It is codified as US Code Title 11 and provides guidelines on handling all bankruptcy procedures from qualification to filing to discharges.

For consumers struggling with debt, bankruptcy is a welcome tool. Chapter 7 halts debt collection upon filing and discharges all qualifying debts within months. Chapter 13 provides a new plan to pay creditors over a set period and eventually discharges the remaining debt. Think of filing bankruptcy as a way to start over, but beware that bankruptcy will impact your credit for up to 10 years.

SoloSuit helps consumers get out of debt with suitable products at every step. Our web-based app lets users communicate with creditors, respond to debt collection lawsuits, and settle past-due accounts to avoid going to court.

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