According to statistics, the number of annual bankruptcy filings in America added up to 557,376 by September 2025. In legal terms, bankruptcy can be filed under different chapters in the United States Law. Chapter 7 mostly deals with liquidation bankruptcy, which may also be seen as a fresh start. On the other hand, Chapter q3 bankruptcy deals with reorganisation bankruptcy for repayment of debts. Want to know more about the key differences between Chapter 7 and Chapter 13 bankruptcy? Then keep reading.
About Chapter 7 and Chapter 13 Bankruptcy
Bankruptcy is a complicated process, especially in the US, and is carefully overseen by the US Federal Courts. Bankruptcy rules protect individuals, businesspersons, families, and couples from complete financial ruin caused by giant debts.
When someone files for a Chapter 7 or Chapter 13 bankruptcy, many of their debts get cleared. However, it is important to note that not all debts may be cleared even after filing under these two chapters.
Some of the debts that can be nullified under Chapter 7 and Chapter 13 are:
- Credit card bills that have not been paid for months
- Medical bills
- Rent or utility bills that have not been paid for months
Who can file for which chapter?
Chapter 7 bankruptcy is meant for both individuals and business entities that are bankrupt. Chapter 13 bankruptcy, on the other hand, is reserved solely for individuals and sole proprietors.
The major difference between these two chapters is that Chapter 7 relies on getting rid of debts like unpaid credit card bills and personal or medical loans, while Chapter 13 helps you secure debts for your home loan and car loan.
How does each chapter work?
Chapter 7 bankruptcy takes into account your assets right from when you file a case. Many of your assets are protected, especially the ones that are exempted, and most of the things that you own are discharged, and your debt is cleared.
For Chapter 13 bankruptcy, your financial conditions are definitely taken into account, but there is a fixed repayment plan to deal with your secured debts, such as home or car loans. Here too, most of your unsecured debts will be cleared.
Income restrictions under each chapter
The Chapter 7 Means Test is an eligibility criterion that you must first pass to file for Chapter 7 bankruptcy. This Means Test will compare your current monthly income average to the income of the remaining families living in the same region. If your income turns out to be greater than the median income, you will not be eligible.
However, if you wish to know more about how to pass the eligibility criteria, it’s always best to speak to a professional bankruptcy attorney Roanoke VA.
Both Chapters 7 and 13 also take into account your disposable income, which is your income left after paying required living expenses to pay off your debt. If your disposable income is enough to qualify for Chapter 13 bankruptcy, you should go for that.
Duration of each case
In a typical Chapter 7 bankruptcy case, the person filing for it will receive a discharge notice, and the case will mostly be closed within four to six months after filing for bankruptcy.
But for a Chapter 13 bankruptcy case, the case will remain open until all necessary payments have been made as per the repayment plan. In many situations, a Chapter 13 case might take between three and five years to be closed.
Lien Stripping
Cramdowns and lien stripping are prohibited under Chapter 7 cases. Typically, a debtor will give up their property when they are unable to repay the loans. But once the creditor liquidates the collateral property, they cannot take any legal action against the debtor.
However, cramdowns and lien stripping are both permitted in Chapter 13 cases. In a cramdown, the debtor can ask to reduce the principal loan balance to an amount equal to the value of the asset.
For example, if you owe a $10,000 debt for a loan for a car worth $6000, then you can reduce the loan balance to $6000, and the remaining $4000 will be unsecured debt.
See also: Navigating the complexities of Family Law
Should you choose a Chapter 7 or Chapter 13 bankruptcy?
Choosing whether to file for Chapter 7 or Chapter 13 bankruptcy will depend on your specific circumstances. If you have a stable income but you’re left with heavy mortgage and loans, then a Chapter 13 bankruptcy will be a better idea.
However, if you have only a few assets, then Chapter 7 bankruptcy can solve your debts quite quickly, within only three to five months.
Conclusion
Before filing for bankruptcy, you must speak to experienced lawyers from reputed law firms who will guide you through the entire process. Once you have the right perspective, it’ll be easier to navigate the legal routes.
