Chapter 7 vs. Chapter 13 Bankruptcy


In general, consumers have the choice of two bankruptcy chapter filings either Chapter 7 or Chapter 13.  A guideline in question and answer format describing the differences is provided below:

  • Do I have to qualify? 

Chapter 7: Yes, debtors must meet a "means test" in order to qualify. If your current monthly income (average income for past six months) is higher than the median income for a family of your size in Alabama, then you will be presumed to qualify.  If, however, your income exceeds the the median income for a family of your size, then your must pass the "means test" in order to be eligible for Chapter 7.  The means test considers whether you have sufficient disposable income to repay unsecured debts.

Chapter 13: No, but debtors must have debts less than certain amounts.

  • What happens to my debt? 

Chapter 7: Most debt is extinguished at conclusion of bankruptcy, but there are exceptions for things like student loans and some taxes.

Chapter 13: Debt is paid off over a period of time, usually between 3 and 5 years under a payment plan that must be approved by the court.

  • Can I keep my house? 

Chapter 7: Maybe.  It depends on the amount of equity in your home and other factors.

Chapter 13: Maybe.  It depends on the amount of equity in your home.  Mortgage payment may become part of payment plan.

  • Can I keep my car? 

Chapter 7: Maybe.  It depends upon the equity and other factors.

Chapter 13: Usually.  Payments have to be made over three to five years.

  • What about my other asset?:   

Chapter 7: Your non-exempt assets are sold to pay creditors. You generally keep the exempt assets. 

Chapter 13: You can keep most assets.  If, however, you fall behind in your payment plans, then your assets could be sold.

  • Will I repay my debts?

Chapter 7: Not the extinguished debt.  Other debt, such as student loans and some taxes will still have to be paid.

Chapter 13: Typically over a period of three to five years, you will make reasonable payments.  These payments will vary depending upon income.

  • How long will bankruptcy process take?  

Chapter 7: It usually takes 3-6 months to reach conclusion.

Chapter 13: Usually anywhere from three to five years--debtor has made all payments in accordance with the court approved payment plan and discharge order has been entered by court.

  • Does it impact my credit rating? 

Chapter 7: Yes, the filing may remain on your credit report for up to 10 years.

Chapter 13: Yes, the filing may remain on your credit report for either 7 or 10 years.