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Understand the Differences Between Chapter 7 and Chapter 13 Bankruptcy

By: Rumzz Bajwa



Financial hardships can make your day-to-day extremely difficult. The general purpose of either a Chapter 7 or Chapter 13 bankruptcy is to provide the needed relief to get your financial health back into good standing. It may be that you need to cut personal expenses to increase cash flow, if possible. With that being said, if you are considering filing bankruptcy, it is important to understand which route is best for you. There are many times where individuals choose the wrong debt relief decision.

In this article we will go through some of the main differences between Chapter 7 and Chapter 13 bankruptcy, how bankruptcy works, as well as:

  1. Benefits and Setbacks to Chapter 7 Bankruptcy
  2. Benefits and Setbacks to Chapter 13 Bankruptcy
  3. Is Chapter 7 better than Chapter 13 Bankruptcy?
  4. Using Your Data to Estimate Costs, Pros, and Cons with a Chapter 7 or Chapter 13 Bankruptcy Calculator
  5. Alternatives to Filing Bankruptcy

Benefits and Setbacks to Chapter 7 Bankruptcy

Chapter 7 bankruptcy, also known as “the liquidation bankruptcy”, is the process where you are wiping your unsecured debt and any assets that are not protected under your state’s bankruptcy exemptions. If there are any assets that are wiped out in a Chapter 7 bankruptcy, the cash attached will be used to repay your creditors.

How to File Chapter 7 Bankruptcy

When it comes to filing Chapter 7 bankruptcy, you need to qualify. The US government uses means testing to determine whether or not you are eligible to file a Chapter 7 bankruptcy. The income requirements are based on:

  • Household Size
  • Annual Gross Household Income
  • State You Reside In

There are some protected incomes that are not used to determine your household income for the Chapter 7 means test.

Pros and Cons to Chapter 7 Bankruptcy

While there are many pros to filing bankruptcy, there are cons attached. While you are able to receive relief and get your financial health in better shape, you may see a decrease in your credit score after filing Chapter 7. You can also find an affordable Chapter 7 bankruptcy, which is a pro to many people.

Pros to Chapter 7 Bankruptcy

  • Wipe out unsecured credit card debt
  • Wipe out medical bills
  • Wipe out unsecured personal loans
  • Legal protection against creditors
  • Discharged after around 120 days
  • Less expensive than Chapter 13 Bankruptcy

Cons to Chapter 7 Bankruptcy

  • Remains on credit report for 10 years
  • High impact on credit score
  • Potential risk of assets
  • Limited opportunities for credit

Benefits and Setbacks to Chapter 13 Bankruptcy

Chapter 13 bankruptcy is considered the “wage earners” plan. This bankruptcy is often a popular route for individuals that have equity in high value assets that would not be protected in a Chapter 7 bankruptcy, or do not pass the Chapter 7 means test.

Chapter 13 Plan Payment

When it comes to filing a Chapter 13 bankruptcy, you are put on a 3 to 5 year repayment plan rather than the Chapter 7’s 120 day process. One of the determining factors between being on a 3 or 5 year plan is whether you fall below the Chapter 7 median income guideline.

Example: Joe lives in Arizona and has $200,000 in home equity and Arizona’s homestead exemption is $150,000. His annual gross household income falls below the median income, however, he may have to sell his property in a Chapter 7, as the home equity is greater than the homestead exemption. His Chapter 13 plan payment may be for a 3 year plan since he is below the median income guideline.

The monthly Chapter 13 Plan Payment can consist of:

  • Attorney Fee
  • Administration Fee
  • Trustee Fee
  • Mortgage
  • Auto Payments
  • Secured Payments
  • Disposable Income

Pros and Cons to Chapter 13 Bankruptcy

Filing a Chapter 13 bankruptcy can be a long process but can allow individuals to get caught up on secured loans. Here are some of the pros and cons attached:

Pros to Chapter 13 Bankruptcy:

  • Legal protection against creditors
  • Helps with arrears on secured loans
  • Gets rid of unsecured debt

Cons to Chapter 13 Bankruptcy:

  • 3 – 5 year repayment plan
  • Chapter 13 bankruptcy on credit score for 7 years
  • High impact on credit score
  • Low opportunity for credit

While, there may be more pros and cons to filing a Chapter 13 bankruptcy based on your specific situation, it is important to consider the general list, as it may help make your debt relief decision.

Is Chapter 7 Bankruptcy Better Than Chapter 13 Bankruptcy?

The amount of times I get the question of, “Which is better, Chapter 7 or Chapter 13?” is countless. The unfortunate truth is that there is no straightforward answer, it depends on your specific situation. However there are factors to consider that could potentially help you make your decision.

The first piece I would recommend starting with is seeing if you qualify for Chapter 7. If you find that you may qualify, then look over your assets and the bankruptcy exemptions and find out if there is any risk of losing a valuable asset through a Chapter 7. Next, I would understand the importance of credit impact. If having less damage to your credit score is important, there are alternatives to bankruptcy that you may want to consider.

The bottom line is that Chapter 7 should always be a less expensive option compared to Chapter 13. If you are able to protect the assets you would like to and qualify for Chapter 7, it may be helpful to speak with a bankruptcy attorney for a free evaluation. If you have anything in arrears and need help catching up, a Chapter 13 bankruptcy may offer the assistance you are looking for.

Using Your Data to Estimate Costs, Pros, and Cons with a Chapter 7 or Chapter 13 Bankruptcy Calculator

Filing bankruptcy can be a huge decision so understanding the costs, pros and cons attached is extremely important. With that being said, you can take our Chapter 7 vs Chapter 13 bankruptcy calculator to directly compare your options based on your specific data.

Some of the most important factors to consider when deciding your debt relief options can be:

  1. Chapter 7 Qualification
  2. Chapter 7 and Chapter 13 Bankruptcy Cost
  3. Attorney Fees
  4. Pros and Cons to Chapter 7 and Chapter 13 Bankruptcy
  5. Alternatives to Bankruptcy

Alternatives to Filing Bankruptcy

Bankruptcy is not for everyone. Fortunately, there are options outside of bankruptcy in case bankruptcy doesn’t feel like it may be the best option for you.

Debt consolidation, debt management, and debt settlement are three alternatives that can help provide the financial relief you need. These options can allow you to get out of debt without having to file bankruptcy.

Debt Settlement

Debt settlement is the process of either working with a company or doing it yourself, to negotiate with your creditors and bring down the total amount of debt you owe. This option can allow you to resolve the account and also steer clear of having bankruptcy on your report for 7 to 10 years.

Debt Consolidation

Similar to debt settlement, this process is generally backed by a new loan that consolidates your debt into a payment plan. This can be helpful for individuals that are unsure if settling the accounts is the best path for them.

Debt Management

Debt management is also quite similar to debt settlement, however, with this route you would be negotiated the interest rate rather than the total amount of debt owed.


Credit card debt, medical bills and divorce are common reasons to seek bankruptcy relief. Whether you are currently stressing due to your current debt to income ratio, or you are ready to tackle the debt you have, there are options out there for you. Some of the most popular consumer bankruptcy options are Chapter 7 and Chapter 13 bankruptcy. If bankruptcy does not seem like the best route for you, you can also look into debt settlement, debt management, or debt consolidation.

Published: September 4, 2021

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Rumzz Bajwa

Rumzz Bajwa is a digital strategist and content marketer. She enjoys spending time with her family. She loves to go out and experience new moments whenever they came to light. Rumzz discovers satisfaction in investigating new subjects that help to extend her points of view. You can frequently locate her immersed in a good book or out searching for a new experience.

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