If you’re at the end of your rope and wondering whether bankruptcy is the right next step, it’s important to understand which type of filing might be best for your specific situation.
Those who declare personal bankruptcy almost always file for either Chapter 7 and Chapter 13. These are the two most common types of personal bankruptcy, but they work in very different ways.
Let’s walk through the key differences between Chapter 7 and Chapter 13 bankruptcy, and discuss when you might want to opt for these last resorts — and what you might try before filing.
Bankruptcy Basics: Chapter 7 vs. Chapter 13
It’s worth remembering that, before getting too deep into the weeds, that bankruptcy is a good thing: It can help you overcome extreme financial situations and move forward from crushing debts. But the process can be complicated, long and stressful. Knowing what to expect can help you gain peace of mind before heading to court.
Qualifying for Chapter 7 and Chapter 13 Bankruptcy
There are a few different types of personal bankruptcy, but by far the most common are Chapter 7 and Chapter 13. These have different qualification thresholds, and are best suited to different financial situations.
Chapter 7 is the faster, more aggressive type of bankruptcy. You may qualify if your income is below a certain level. This is called a “means test,” and it compares your income to others in your state. If you pass, you might be allowed to file.
Chapter 13 works differently. Instead of wiping out your debts quickly, it sets up a repayment plan. This option is only available if you have a steady income and can show that you can afford regular payments.
How Long is the Process of Bankruptcy?
Just as the means of qualifying differ between Chapters 7 and 13, so too do their individual bankruptcy timelines.
Chapter 7 can be completed in as little as 4 to 6 months, but it often means giving up property you own. If you have assets that aren’t protected by exemptions, they could be sold to help pay what you owe.
When filing Chapter 13, you can keep your property so long as you agree to live on a tight budget while making monthly payments. Typically, this kind of bankruptcy can take over 3 to 5 years to complete.
But it’s worth mentioning that bankruptcy can follow you further than simply the repayment period. Bankruptcy can stay on your credit report for up to ten years, and can impact your ability to open new lines of credit, qualify for financial services and even restrict certain employment opportunities.
What Happens to Your Property During Bankruptcy?
There is a real risk of losing things you own when filing Chapter 7 bankruptcy, including vehicles, valuable electronics, land, housing or even bank accounts. Not everything gets taken, but if your things aren’t protected by exemptions, they could be sold.
Chapter 13 doesn’t necessitate liquidation of assets: You keep your property — even if you’re behind on payments — as long as it’s part of your repayment plan. But this only works if you keep up with your monthly court-approved payments. Missing them can put everything at risk.
Chapter 7 vs. Chapter 13 Bankruptcy Pros and Cons
| Chapter 7 | Chapter 13 | |
| Pros | Quick discharge (4 to 6 months) No ongoing monthly payments | You can keep your property Structured payment plan |
| Cons | You may lose property Lasts 10 years on your credit report | Takes 3 to 5 years to finish Requires steady income Hard to change once you’re in it |
| Best For | Those with limited personal property who cannot cover their debts and who have inconsistent income | Those with personal property they’d rather not liquidate, and who have a steady income to sustain repayment |
Should You Consider Bankruptcy at All?
Bankruptcy can affect where you live, what you drive, your job opportunities and your emotional well-being. And while it can save you from financial peril, bankruptcy can also make future financial steps more difficult.
That means it’s a good idea to evaluate all your options before beginning the process of filing. For many people, debt consolidation can be a simpler, faster and less intrusive way to get their finances under control. Get all the facts first, then make the right decision for your debt — and your life.