Which Bankruptcy Type Should I File—Chapter 7 or Chapter 13 Bankruptcy?

By Cara O'Neill, Attorney
Most individual filers choose one of two types of bankruptcy: Chapter 7 or Chapter 13.

Bankruptcy works by breaking the contracts that you entered into when you borrowed money—at least many of them. What happens next depends on the type of chapter that you file.

Chapter 7 or “liquidation” bankruptcy is the faster of the two bankruptcy types. If you qualify (your income must be below certain limits), your dischargeable debt will get wiped out in approximately four to five months without the need to pay into a monthly repayment plan. You’re allowed to keep (exempt) property that you’ll need to live, such as household furnishings, clothing, and a modest car. The bankruptcy trustee—the individual responsible for administering your case—will sell any nonexempt property and distribute the proceeds to your creditors.

Chapter 7 bankruptcy tends to work best for:

  • people who are caught up on a mortgage or car payment (unless they’re willing to surrender the property to the bank), and
  • individuals with dischargeable debt, such as utility bills, credit card balances, medical bills, and payday (or other personal) loans.

(You can learn more about Chapter 7 bankruptcy by reading Chapter 7 Bankruptcy Basics.)

Chapter 13 or “reorganization” bankruptcy is better suited for those people who cannot pass the means test (the qualifying test for Chapter 7 bankruptcy) or who have a significant amount of debt that won’t get wiped out in bankruptcy (nondischargeable debt). Typical examples of nondischargeable debt include domestic support obligations, such as spousal or child support, and past-due taxes.

In Chapter 13 bankruptcy, the filer pays all disposable income (the amount left over after paying reasonable living expenses) to the trustee for three to five years. In turn, the trustee pays the creditors. The balance of any dischargeable debt remaining after the completion of the plan gets wiped out.

(For more in-depth information, read Chapter 13 Wage Earner Bankruptcy Basics.)

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