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What Are the Two Major Types of Bankruptcy: Chapter 7 vs Chapter 13
Understanding Bankruptcy Types: What Are the Two Major Types of Bankruptcy What are the two major types of bankruptcy for
December 8, 2025
What Are the Two Major Types of Bankruptcy: Chapter 7 vs Chapter 13
Understanding Bankruptcy Types: What Are the Two Major Types of Bankruptcy
What are the two major types of bankruptcy for individuals? Chapter 7 and Chapter 13 are the two primary bankruptcy options available to consumers seeking debt relief. Chapter 7 is designed to address unsecured debts through a court-supervised process, while Chapter 13 involves a structured repayment plan over time. According to the U.S. Courts, Chapter 7 is the most commonly filed form of consumer bankruptcy.
Bankruptcy Chapters Explained: Chapter 7 Liquidation
Chapter 7 bankruptcy, often called “liquidation bankruptcy,” addresses many unsecured debts through a court-supervised process. This option is commonly used by individuals with limited income who may not be able to repay their obligations. When you file Chapter 7, a bankruptcy trustee reviews your assets and may sell non-exempt property to pay creditors, though most filers keep all their possessions through state and federal exemptions.
Who Qualifies for Chapter 7?
To file Chapter 7 bankruptcy, you must pass the means test established by the U.S. Department of Justice. This test compares your income to your state’s median income level. If your household income falls below the median, you automatically qualify. Higher earners may still qualify if their disposable income after allowed expenses is insufficient to repay debts.
What Debts Does Chapter 7 Discharge?
Chapter 7 eliminates most unsecured debts including credit card balances, medical bills, personal loans, and utility bills. However, certain obligations like student loans, recent tax debt, child support, and alimony typically survive bankruptcy discharge. The process may pause collection activity, lawsuits, wage garnishments, and foreclosure actions through the automatic stay that applies during the bankruptcy case.
Step-by-Step Filing: Chapter 13 Repayment Plans
Chapter 13 bankruptcy differs significantly from Chapter 7 by creating a structured repayment plan rather than eliminating debts immediately. This debt relief option allows you to keep valuable assets like your home or car while catching up on missed payments over 3-5 years. According to the Administrative Office of the U.S. Courts, Chapter 13 plans involve repayment of unsecured debts based on the filer’s disposable income and court approval.
How Chapter 13 Works
After filing Chapter 13, you propose a repayment plan to the bankruptcy court showing how you’ll use your disposable income to pay creditors. Plans lasting 3 years apply to below-median income filers, while 5-year plans are required for above-median earners. Monthly payments go to a bankruptcy trustee who distributes funds to creditors according to priority rules established in the bankruptcy code.
Chapters Compared: Choosing Your Debt Relief Path
Understanding what are the two major types of bankruptcy means recognizing which option suits your unique financial situation. Chapter 7 provides fast debt discharge for those who qualify based on income, while Chapter 13 offers a repayment structure for individuals with regular income who need to protect assets or catch up on secured debts.
Primary Differences to Consider
Filing fees and overall costs differ between Chapter 7 and Chapter 13, with Chapter 13 generally involving additional costs related to repayment administration. Income requirements also vary significantly: Chapter 7 requires passing the means test, while Chapter 13 requires regular income sufficient to make plan payments. Timeline differences are substantial, with Chapter 7 completing in months versus Chapter 13’s multi-year commitment.
Making the Right Choice
Your decision between Chapter 7 and Chapter 13 bankruptcy depends on several factors including your income level, asset value, debt types, and financial goals. Individuals facing imminent foreclosure or vehicle repossession often benefit from Chapter 13’s payment restructuring, while those with primarily unsecured debts and limited income typically prefer Chapter 7’s quick discharge. Consulting with a licensed bankruptcy attorney can help you evaluate which chapter may be appropriate based on your income, assets, and financial circumstances.
Financial Freedom Summary: Your Path to Debt Relief
What are the two major types of bankruptcy? Chapter 7 and Chapter 13 represent distinct paths to financial recovery, each designed to address different financial circumstances. Chapter 7’s rapid discharge eliminates unsecured debts for qualified individuals, while Chapter 13’s structured repayment plan protects assets and addresses secured debt problems. Both options may limit creditor collection activity during the bankruptcy process and are designed to address different types of financial challenges under federal bankruptcy law. Your specific income, assets, and debt profile determine which bankruptcy type offers optimal relief. Taking action to evaluate your options is the critical first step toward regaining control of your financial future and achieving lasting debt relief.
Get Your Free Bankruptcy Evaluation
Ready to learn more about bankruptcy options? You may wish to request a free bankruptcy evaluation to discuss your situation with a licensed attorney and explore whether Chapter 7 or Chapter 13 may be appropriate.
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Frequently Asked Questions
1. What are the two major types of bankruptcy for individuals?
Chapter 7 and Chapter 13 are the two primary bankruptcy types for consumers. Chapter 7 eliminates most unsecured debts through liquidation, while Chapter 13 creates a court-approved repayment plan lasting 3-5 years.
2. How long does Chapter 7 bankruptcy take?
Chapter 7 bankruptcy typically takes 90-120 days from filing to discharge. Most filers receive their debt discharge within four months, making it the fastest debt relief option available.
3. Can I keep my house in Chapter 13 bankruptcy?
Yes, Chapter 13 bankruptcy specifically protects your home by allowing you to cure mortgage arrears through your repayment plan. This stops foreclosure and gives you time to catch up on missed payments.
4. What is the means test for bankruptcy?
The means test compares your household income to your state’s median income to determine Chapter 7 eligibility. If your income exceeds the median, additional calculations determine whether you have sufficient disposable income to repay debts.
5. How much does it cost to file bankruptcy?
Chapter 7 filing fees are $338, while Chapter 13 costs $313 to file. Attorney fees vary by location and case complexity, but many bankruptcy lawyers offer payment plans to make filing accessible.
Key Takeaways
- Chapter 7 and Chapter 13 are the two major types of consumer bankruptcy, each designed for different financial situations and debt relief needs.
- Chapter 7 eliminates unsecured debts within 3-4 months for individuals who pass the means test, offering the fastest path to debt discharge.
- Chapter 13 creates a 3-5 year repayment plan that protects assets, stops foreclosure, and allows you to catch up on secured debt payments.
- Both bankruptcy chapters provide automatic stay protection that immediately stops creditor collection actions, lawsuits, and wage garnishments.
- Consulting with a qualified bankruptcy attorney helps you determine which debt relief option maximizes your financial recovery and protects your important assets.
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