Key takeaways
- Chapter 7 can wipe out many unsecured debts within a few months, but a trustee may sell property that isn’t protected.
- Chapter 13 sets up a three- to five-year repayment plan and can help you keep your home by catching up on missed payments.
- Both require credit counseling from an approved agency within 180 days before you file.
- Some debts usually can’t be wiped out, like child support, many taxes and most student loans.
- Talk to a bankruptcy attorney. Many offer a free first consultation.
Bankruptcy is a legal process created to give people a way out when debts are far beyond what they can repay. It has serious, lasting effects, and it isn’t the right choice for everyone. But it can also be the most realistic path for some people. The two types most individuals use are Chapter 7 and Chapter 13. This is a plain-language overview. It isn’t legal advice, and the details depend on your situation and your state.
The quick answer
Chapter 7 is often used by people with lower income and few assets they’d want to protect. Chapter 13 is often used by people with regular income who want to keep property, such as a home they’re behind on, and can afford a repayment plan.
Side by side
| Chapter 7 | Chapter 13 | |
|---|---|---|
| What it is | “Liquidation”: a trustee may sell property that isn’t exempt to pay creditors | A court-approved plan to repay some or all debts over time |
| How long | Discharge often comes within a few months of filing | The plan usually lasts three to five years |
| Income test | If your income is above your state’s median, a “means test” applies | You need regular income, and debts must be under set limits |
| Your property | Exempt property is protected; other property may be sold | You generally keep your property while you make plan payments |
| Behind on a mortgage? | Doesn’t, by itself, let you catch up on missed payments | Lets you catch up on missed payments through the plan |
| Credit report | Can stay up to ten years | Can stay up to ten years |
Sources for the table: the U.S. Courts’ Chapter 7 and Chapter 13 basics pages, and the CFPB, which says bankruptcies can stay on your report for up to ten years.
Chapter 7 in more detail
In Chapter 7, a court-appointed trustee reviews your property. Property that’s exempt under federal or state law, often things like a modest amount of home equity, a car up to a certain value, household goods and retirement accounts, is protected. Non-exempt property may be sold to pay creditors. Exemptions vary a lot by state, which is one reason an attorney matters.
If your income is above your state’s median, you’ll take a means test to see whether you qualify for Chapter 7. According to the U.S. Courts, the discharge order is usually issued 60 to 90 days after the meeting of creditors, if no one objects.
Chapter 13 in more detail
In Chapter 13, you propose a plan to repay some or all of your debts over three to five years, making payments to a trustee who pays your creditors. According to the U.S. Courts, if your income is below your state’s median, the plan is usually three years unless the court approves longer.
A major benefit: Chapter 13 can help you save your home from foreclosure by catching up on missed mortgage payments over the plan, as long as you keep making new payments on time.
What both require
- Credit counseling before you file. You must complete counseling with an approved agency within 180 days before filing.
- A financial management course before your debts are discharged.
- Full and honest disclosure of your income, property and debts.
Debts bankruptcy usually doesn’t erase
According to the U.S. Courts, some debts generally aren’t discharged, including:
- Child support and alimony.
- Many tax debts.
- Most student loans, except in limited cases.
- Debts for injuries caused by driving while intoxicated.
- Criminal fines and restitution.
How bankruptcy affects your credit
Bankruptcy causes a serious drop in your credit score and can stay on your report for up to ten years. Many people begin rebuilding afterward with on-time payments and small, well-managed accounts. See how to rebuild credit after debt problems, and read how debt relief affects your credit score.
Before you decide
- Talk to a bankruptcy attorney. Many offer a free first consultation. Legal aid may help if you can’t afford one.
- Compare other options, like a debt management plan or debt settlement, with a nonprofit credit counselor through the NFCC.
- Be careful with “bankruptcy alternatives” that charge upfront fees. See 7 signs a debt relief company is a scam.
- If you’ve been sued, bankruptcy may affect the case. Read what to do if you’re sued for a debt.
The bottom line
Chapter 7 offers a faster fresh start but may cost you non-exempt property. Chapter 13 takes years but can help you keep your home and other property. Both have strict rules and lasting credit effects, so get advice from a bankruptcy attorney before you decide.
Sources: U.S. Courts: Chapter 7 bankruptcy basics · U.S. Courts: Chapter 13 bankruptcy basics · U.S. Trustee Program: approved credit counseling agencies · CFPB: how long negative information stays on your report