Bankruptcy Basics: Chapter 7 vs. 13 in Plain English

When bills keep piling up, it can feel like there’s no way out: minimum payments, collection calls, and the constant worry that one more emergency will push everything over the edge. Bankruptcy is a serious step, but it’s also a legal tool designed to give honest but overwhelmed people a fresh start. Most consumers who file choose between Chapter 7 and Chapter 13, and the differences between them are big enough to change your day-to-day life for years. The jargon can make it sound like you’re choosing between two codes instead of two real-world paths. Here’s what Chapter 7 and Chapter 13 actually mean in plain English, how they work, and what to ask before you talk with a lawyer about either option.

Chapter 7 in plain English: liquidation and a fast fresh start

Chapter 7 bankruptcy is often called “liquidation” because, in theory, a court-appointed trustee can sell your non-exempt property and use the money to pay creditors. In practice, many consumer Chapter 7 cases are “no-asset” cases, meaning everything you own is protected by federal or state exemption laws and there’s nothing for the trustee to sell. In exchange, most of your unsecured debts — like credit cards, many medical bills, and personal loans — are wiped out in a relatively short time, usually around four to six months from filing to discharge.

When you file Chapter 7, an automatic stay kicks in. That’s a court order that generally stops most collection actions: lawsuits, wage garnishments, repossession efforts, and aggressive collection calls. A trustee is assigned to your case to review your paperwork, check for non-exempt assets, and make sure your creditors are treated according to the Bankruptcy Code. In most straightforward consumer cases, you attend a single brief “meeting of creditors” (sometimes called a 341 meeting), often by phone or video, and never see the judge unless there’s a dispute.

Not everyone qualifies for Chapter 7. Under federal law, most individual filers must pass a “means test” that compares their income to the median income in their state and looks at allowed expenses to determine whether a Chapter 7 filing would be an “abuse.” If your income is too high after allowable expenses, you may be steered toward Chapter 13 instead. On the other hand, there’s no minimum amount of debt required, and both individuals and certain businesses can file Chapter 7 if they meet the criteria.

Chapter 7 does not eliminate everything. Certain debts are generally non-dischargeable, including most student loans (unless you prove undue hardship in a separate proceeding), recent income taxes, child support, alimony, and debts arising from some types of fraud or intentional injury. You’ll also still need to pay ongoing obligations like current taxes, utilities, and new debts you take on after filing. If you want to keep secured property, like a car or home, you typically must stay current on those payments and may need to reaffirm or otherwise deal with those loans during the case.

The impact on your credit report is real but not permanent. A Chapter 7 bankruptcy can remain on your credit reports for up to 10 years from the filing date. That said, many people can start rebuilding credit sooner than they expect, especially if their credit was already damaged by late payments and collections. Some lenders specialize in working with post-bankruptcy borrowers, and responsible use of new credit over time can help your scores recover.

Fees and costs are another factor. Chapter 7 involves a court filing fee plus any attorney’s fees if you hire a lawyer, which is strongly recommended for most consumers because of the complexity and long-term consequences. In some situations, the court can allow the filing fee to be paid in installments or even waived if your income is very low. Nonprofit legal aid organizations sometimes provide free or low-cost help for eligible filers.

Because Chapter 7 is relatively fast and wipes out a large share of unsecured debt, it can be a powerful fresh-start tool when you simply cannot keep up. But the trade-offs are serious: you may lose non-exempt property, you cannot pick and choose which creditors are included, and the filing will show up in background checks and lending decisions for years. That’s why many people sit down with a bankruptcy attorney or certified nonprofit credit counselor first to confirm that Chapter 7 is the best fit rather than a last-minute reaction to a collection scare.

Chapter 13 in plain English: repayment plan and catch-up

Chapter 13 bankruptcy works very differently. Instead of liquidating property, Chapter 13 is a court-supervised repayment plan for individuals with regular income, including wage earners, the self-employed, and sole proprietors. You propose a plan to pay some or all of your debts over three to five years, based on your disposable income and the types of debts you owe. As long as you make the required payments and follow the plan, you generally keep your property.

Just like in Chapter 7, filing a Chapter 13 case triggers an automatic stay that halts most collection activity. But instead of a short path to discharge, you now have a structured budget: you make regular payments to a Chapter 13 trustee, who distributes the money to your creditors according to the court-approved plan. Certain debts, such as priority taxes and ongoing support obligations, usually must be paid in full through the plan, while general unsecured debts (like credit cards) may receive only a portion of what you owe.

Chapter 13 is often used by homeowners who are behind on a mortgage but want to stop foreclosure and catch up over time. The plan can spread out mortgage arrears over the three-to-five-year period while you keep making current payments, allowing you to cure the default and keep your home as long as you stay on track. Chapter 13 can also help manage car loans, certain tax debts, and other obligations that cannot be easily handled in Chapter 7.

To qualify, you need a steady enough income to support both your regular living expenses and your plan payments. The Bankruptcy Code also imposes debt limits on Chapter 13 — if your secured and unsecured debts are over certain thresholds, you may need to look at other chapters instead. (These limits are adjusted from time to time, so you or your attorney should always verify the current numbers.) You must also have filed required tax returns for recent years before the court will confirm your plan.

At the end of a successful Chapter 13 plan, any remaining eligible debts covered by the plan are discharged. In some ways, the Chapter 13 discharge can be broader than Chapter 7, wiping out certain debts that would survive a Chapter 7 case, such as some divorce-related property settlements and certain debts incurred to pay nondischargeable taxes. But there’s an important catch: national data show that less than half of Chapter 13 cases result in a completed plan and discharge. Life events — job loss, illness, divorce — can make it hard to stick to a tight budget for three to five years.

On your credit report, a Chapter 13 filing can generally stay for up to seven years from the filing date, which is shorter than Chapter 7’s 10-year mark. Some people prefer Chapter 13 for that reason, or because they like the idea of repaying part of what they owe under supervision rather than walking away from most unsecured debts. Others choose it because Chapter 7 simply doesn’t work for them due to income, assets, or the kinds of debts they have.

Because Chapter 13 is a long commitment, it demands a realistic budget and honest assessment of your income, job stability, and family obligations. A plan that looks good on paper but leaves no room for car repairs, medical bills, or modest savings is more likely to fail. That’s why good Chapter 13 attorneys and nonprofit counselors push hard on the numbers before filing — they know that a dismissed case can leave you worse off, with lost time and a temporary automatic stay that has already been used up.

Chapter 7 vs. Chapter 13: big-picture differences and trade-offs

Looking at Chapter 7 and Chapter 13 side by side makes the trade-offs clearer. Chapter 7 is usually faster, cheaper, and better at wiping out unsecured debt, but it puts any non-exempt property at risk and doesn’t offer a structure to catch up on secured debts. Chapter 13, by contrast, acts more like a court-supervised payment plan: you keep your stuff, but you commit your disposable income for years and accept tighter oversight. Which one is “better” depends entirely on your debts, assets, income, and goals.

Deciding between the two isn’t just about which one clears more debt. It’s about how each chapter fits into your life over the next several years. If your income is unstable, a long Chapter 13 plan may be hard to sustain, and a failed plan could leave you back in collections. On the other hand, if you have equity in a house you want to save or non-exempt assets you’d lose in Chapter 7, Chapter 13 can be a way to reorganize instead of liquidate.

There are also emotional and practical differences. Some people feel strongly about repaying at least part of what they owe if they can, and Chapter 13’s structure supports that. Others are simply too far underwater for a long plan to make sense — every dollar going to old debt is a dollar not going to future stability, savings, or retirement. The “right” chapter is the one that best positions you to meet your basic needs and rebuild after the case ends, not the one that sounds nicer on paper.

It also helps to think beyond bankruptcy: are there realistic alternatives such as nonprofit credit counseling, a debt management plan, negotiating directly with creditors, or selling assets on your own timeline instead of through a trustee? Agencies like the FTC and CFPB stress that bankruptcy should be considered when other strategies won’t realistically solve the problem within a reasonable time and when collections, lawsuits, or garnishments are threatening your basic stability. A consultation doesn’t commit you to file; it simply helps you compare paths while there’s still time to choose.