Difference Between Chapter 7 and Chapter 13 Bankruptcy - Quicken Loans Zing BlogIf you’re struggling to pay current debt and are debating whether or not to declare bankruptcy, it’s important to understand what is involved and what it will do to your credit report.  While there are attorneys who agree to help those with a debt totaling as little as $5,000, your debt should be large enough to justify not only the legal expenses but also the personal consequences of what you’re about to do.

Here, we’ll review what bankruptcy is and the differences between Chapter 7 bankruptcy and Chapter 13 bankruptcy.

What is Bankruptcy?

Bankruptcy is a federal court process designed to eliminate debts or repay them under the protection of the bankruptcy court. For individuals, most people file either Chapter 7 or Chapter 13 because a court order can call an “automatic stay,” prohibiting most creditors from hounding you to collect what you owe.

However, you must consider the costs, both financially and socially, before taking action. If you declare bankruptcy, renting an apartment, a car, or buying a house will be extremely difficult because of your credit.  In addition, future job opportunities could be compromised, perhaps leading to more financial issues.

Make sure you consult an attorney who can explain state laws as well as the pros and cons of your specific case.

What is Chapter 7 Bankruptcy?

Of all the types, Chapter 7 is the most severe and takes about four to six months to complete. It is a liquidation plan where most of your assets are sold off to repay lenders and creditors. You will have to pass the means test in order to file – meaning, you need to have an income below or equal to the median income in your state. If you qualify after the means test, you will have to complete a credit counseling session before filing.

In the process, you ask the court to discharge most of the debts you owe. In exchange, a court-appointed trustee can liquidate assets that are not exempt from collection (clothing, pensions and portions of real estate and family heirlooms are typically exempt), sell it, and distribute the funds to your creditors. However, some debts cannot be discharged, such as mortgage loans, car loans, child support, alimony and certain taxes.  In addition, federal student loans cannot be discharged unless you’re able to prove that paying off the loan would leave you in great hardship (which is often tough to prove).  If you have cosigners on any loans, creditors can still contact them for the payments, so you’ll want to give them a heads up.

The Chapter 7 Bankruptcy Process

You’ll fill out several forms listing your income, assets and debt. You have to list everything, or it might not be erased and may be even be considered an act of fraud. You’ll then pay a fee to file a petition for bankruptcy court and a date will be set.  The petition automatically prevents creditors from garnishing your wages or suing you.  Your creditors will be informed and you’ll receive a court-appointed trustee to oversee the process.

About a month after you file, you’ll attend a hearing in which creditors can view your debt and the trustee will arrange to sell off your nonexempt items.  Depending on the state you live in, you could lose your second home, second car, stock or bond certificates, certificates of deposit, heirlooms and any valuable collections such as coins or stamps.

After that, you will not have to pay dischargeable debt, which includes, late rent and utility bills, credit cards, medical bills and documented loans from friends and family.  By law, creditors cannot try to collect from the original debt.  However, some non-dischargeable debts may still exist, and if creditors deem them “fraudulent,” you can still be approached by collection agencies.

The petition creates a separate, taxable bankruptcy estate consisting of all assets that belonged to you before you filed.  Your trustee is responsible for preparing and filing taxes attached to the estate but you are responsible for taxes not connected, such as income tax.

Remember, Chapter 7 stays on your credit for 10 years.

What is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy is a repayment plan in which you agree to pay back a portion of the money you owe, based on your income and size of your debts.  You can file it when you want to keep your home, you have regular income, and your unsecured debt is below $360,475 and secured debt is less than $1,081,400.

It doesn’t require you to liquidate your assets – you can keep them while you’re making payments. You’re protected against foreclosure and creditors can’t garnish your wages or send collectors after you. You’re allowed to separate your debts by class, meaning different percentages of payment to each creditor.  If you arrange to pay back your debts in full, your creditors can’t go after anyone who has cosigned on a loan.

Unlike the relative swiftness of Chapter 7, the process takes approximately three to five years. Plus, Chapter 13 stays on your record for seven years.

The Chapter 13 Bankruptcy Process

You’re only required to make one monthly payment to your trustee, who will give the funds to the various creditors.  They are paid based on priority (tax authorities, child support/alimony and administration costs).  Lenders are then paid, followed by credit card companies, medical providers, utilities, and more.

Just like Chapter 7, you’ll fill out the same papers, pay a fee and receive a court-appointed trustee.  You have to submit a plan for repayment, which the court can either accept or reject.

After you have filled out a form listing your assets and income and set up a confirmation hearing, your trustee will begin making payments to your creditors based on the court-approved repayment schedule.

You’ll pay back your debts from your own income, and if some survive after your bankruptcy is closed, you have to keep paying back those debts.

The petition does not create a separate taxable estate, so you’ll continue to pay taxes just like you did before you filed.

While you may get relief from debt with both forms of bankruptcy, the consequences last a long time. It may take longer than 10 years to recover and truly improve your credit. So before you file for bankruptcy, make sure to consult a lawyer to see if an alternative option such as debt consolidation may be a better fit for you.


Victoria Araj is a writer for Quicken Loans, an amazing place to work.  Find out more about being a part of our team at Quicken Loans and learn how we Amaze our clients.

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This Post Has 6 Comments

  1. I actually did not know there were different kinds of bankruptcy that could be filed. That is really interesting that Chapter 7 bankruptcy has a hearing where people will determine if you can really file or not. I have some friends in financial turmoil right now and I’ll have to pass this article along to them so they can make the best choice. Thanks for the great info!

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