Chapter 7 vs. Chapter 13 bankruptcy: which is right for you?

Bankruptcy is a federal legal process that gives people overwhelmed by debt a fresh start. For individuals, the two main options are Chapter 7 and Chapter 13.

Chapter 7: liquidation

• Wipes out ("discharges") most unsecured debts, such as credit cards, medical bills and personal loans, usually within about three to four months of filing.
• You must pass a means test based on your income compared with your state's median, and on your expenses.
• A trustee can sell non-exempt property to pay creditors, but exemption laws protect many essentials, and many Chapter 7 cases have no assets to sell.
• It doesn't stop foreclosure in the long term if you are behind on your mortgage.

Chapter 13: repayment plan

• You repay some or all of your debts through a court-approved plan over three to five years.
• It can let you catch up on missed mortgage or car payments and keep the property.
• It suits people with regular income who don't qualify for Chapter 7, or who have assets they want to protect.
• Remaining eligible unsecured debts are discharged when the plan is completed.

What both have in common

• An automatic stay stops most collection activity, lawsuits, wage garnishments and foreclosures as soon as you file.
• You must take credit counseling from an approved agency before filing, and a debtor education course before discharge.
• Some debts usually survive, including most student loans, child support, alimony, recent tax debts and debts from fraud.
• Bankruptcy appears on credit reports for years (up to 10 years for Chapter 7, generally 7 for Chapter 13), though many people start rebuilding credit soon after.

Do you need a lawyer?

You can file without one, but mistakes can lead to dismissal or lost property. Bankruptcy lawyers commonly charge a flat fee for Chapter 7, and much of a Chapter 13 fee can be paid through the plan. Many offer free consultations.