Chapter 7 or Chapter 13: Which Bankruptcy is Right for You
This article is part of a comprehensive guide to bankruptcy in Oregon. Go here to read the guide and see related articles.
If you are overwhelmed by debt, bankruptcy might help. There are two main kinds of personal bankruptcy: Chapter 7 and Chapter 13. Each works differently. What is best for your situation depends on how much money you make, the kind of debt you have, and your financial goals.
This guide explains the key differences between Chapter 7 and Chapter 13 bankruptcy to help you decide.
What is the difference: Chapter 7 vs Chapter 13 bankruptcy
Chapter 7 bankruptcy: Faster, simpler, for people with lower incomes
- Wipes out most debts, including credit cards, medical bills, and personal loans
- A faster process, usually about 90 days from start to finish
- Only available if your income is low enough to qualify
In Chapter 7, you may have to give up things you own:
- You can keep basic items and essentials, called exempt property, like clothing, household items, and work tools.
- Other possessions and property, called non-exempt property, may be sold to repay debts.
Chapter 7 stays on your credit report for 10 years.
Chapter 13 bankruptcy: A payment plan to keep your property and catch up on debt
- No income limit, but your total debt must be below a certain amount
- A longer process that follows a 3-year or 5-year payment plan based on your income
- Keep your property if you make all required payments
- Helps you catch up on payments so you can keep a house or car
A Chapter 13 bankruptcy stays on your credit report for 7 years, but making on-time payments during the plan can help rebuild your credit.
Is Chapter 7 or Chapter 13 the right choice for me?
Consider Chapter 7 if:
- Your income is low enough to qualify under the means test, which is a bankruptcy court process that considers how much money you make and your expenses.
- You don't have enough money left after expenses to repay debts.
- Most of your debt comes from credit cards, medical bills, or personal loans, and not business debts.
- You don't own valuable items or property that could be taken to pay debts.
Some people don't have to take the means test, including those whose debts mostly come from running a business and some veterans. You can find more information about the means test here.
Consider Chapter 13 if:
- You have regular income that lets you make monthly payments.
- Your total debt is below federal limits for both secured debts (debts tied to specific property, like mortgages or car loans) and unsecured debts (like credit cards and medical bills).
- You want to keep your home or car and need time to catch up on missed payments.
Chapter 13 requires payments for between 3 to 5 years. If you miss payments, your case could be dismissed, and you'd lose bankruptcy protection. But you might be able to get back on track by working with the official in charge of your bankruptcy case.
Continue learning about bankruptcy:
- What you can and can't keep: Learn how bankruptcy affects your property here.
- How to file: Explore how the bankruptcy filing process works here.
Other Frequently Asked Questions:
Which type of bankruptcy you can use will depend on how much money you make, your expenses, and how much debt you owe.
- For Chapter 7, you have to make less than a certain amount in income.
- For Chapter 13, the total amount of debt that you owe has to be under a certain amount.
- You can learn more about those rules here. A lawyer or credit counselor can help you decide.
If you have a steady income, like as a regular paycheck for work, Chapter 13 may be better because it helps you catch up on missed payments while keeping the things you own or are paying for, like a home or car.
If you can't afford monthly payments, Chapter 7 might be the better choice for faster debt relief.
The court looks at your income, living costs, and how much you owe. Then, it sets a monthly payment it thinks you can afford. You'll make these payments for 3 to 5 years to pay off some or all of your debt.
It's possible to keep some of your belongings in both Chapter 7 and Chapter 13 bankruptcy, including a home or car. But each type has different rules.
In Chapter 13, you can usually keep everything if you follow a payment plan.
In Chapter 7, you can keep some things, like basic household items or tools you need for work. Other items that are valuable may be taken and sold. In some cases, you may be able to keep a car or home you own, depending on how much they are worth and the rules that apply in your case.
Learn more about what you can and cannot keep in bankruptcy in this article.