Bankruptcy: The differences between Chapter 7 & Chapter 13

When you’re facing more bills than income, sorting through the options for debt relief becomes a mission of urgency. You may want to rule out even thinking about bankruptcy because it has such a bad rap in many circles. But the truth is that sometimes it’s your best option. Learning the differences between the two most common forms of consumer bankruptcy, Chapter 7 and Chapter 13, can help you make sound decisions.

If you need to file bankruptcy, you’ll be among millions of Americans who’ve sought this form of court relief from their debts. You’ll have your debts dismissed or reorganized so that you can get out from under them without fear of litigation or harassing collections calls. The fallout on your credit, the amount of debt you’ll need to repay and the timeline will be determined by the type of bankruptcy you’re approved for.

What is Chapter 7 bankruptcy?

Ideally, you’ll get approved for Chapter 7, which is the fastest and lowest-cost debt relief option. Under it, you’ll be able to eliminate all your unsecured and some secured debt in about 90 days. You may be forced to liquidate some assets — to what extent depends upon your state. The national average cost for filing Chapter 7 is $1,800.

The blow to your credit is the biggest negative. Chapter 7 stays on your report for 10 years. However, you can start rebuilding your credit as soon as you discharge all your debts and will start getting credit card offers fairly quickly. Still, it may take a couple of years to receive favorable terms for a credit card or car loan and a few years before you can apply for a home or student loan.

Related article: 6 steps to rebuild your credit after bankruptcy

Qualifying for Chapter 7 bankruptcy depends on several factors, including household income and the number of people in the home. If you’re not approved for Chapter 7, you can then consider Chapter 13.

What is Chapter 13 bankruptcy?

Chapter 13 bankruptcy is a structured repayment of your debts managed by a trustee over the course of three to five years. While it does provide court protection, it also brings a lot of challenges. It stays on your credit for seven years, and it’s likely you won’t get approved for any credit during the repayment period. So it will take a while to rebuild your credit. Also, the cost for filing Chapter 13 can start at $3,000, higher than for Chapter 7.

Related article: How much does it cost to file bankruptcy?

Perhaps the biggest challenge with Chapter 13 is its rigidity. If you miss a payment, your bankruptcy will be dismissed, you’ll lose your court protection and you’ll again owe the full amount of your debts. This inflexibility is why about 70% of people who file Chapter 13 do not complete it. Any unexpected financial challenge, such as a health emergency or reduction in income, can cause you to fall off the plan.

“I don’t do Chapter 13. There’s a lot of literature out there about how abusive to consumers it is,”  says bankruptcy attorney, Robert Hauptt of Lathrop Gage LLP. He explains that lawyers get their fees whether or not Chapter 13 is the right solution for a client and even if the client doesn’t complete the repayment plan.

Michael Bovee, co-founder of Resolve, says that “Chapter 13 is not a great option for most people but a palatable one if you’re in the right set of circumstances where you can’t file Chapter 7, you can’t come up with the money to settle or you need creditor protection.” He advises those who can’t qualify for Chapter 7 to look at other debt relief solutions, such as debt settlement, before filing Chapter 13.

Related article: How to file Chapter 13 bankruptcy

Assess your bankruptcy options

If your debt is particularly large and your bankruptcy will be complicated, you may need to file Chapter 11. (This article comparing Chapter 7 and Chapter 11 provides more insight.)

To assess these options, it’s best to talk to a bankruptcy attorney. While you can file bankruptcy yourself, the knowledge and experience that a lawyer brings to your case can certainly be worth the legal fees. And most offer a free, no-obligation initial consultation. You can learn more about bankruptcy on the Resolve website.

How Resolve can help