What Is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy, sometimes called "liquidation bankruptcy," is designed to discharge most or all unsecured debt, providing a fresh start for individuals struggling with overwhelming financial obligations. Under Chapter 7, certain assets may be sold to pay off creditors, but many assets are often exempt under state or federal law, which means you might be able to keep essentials such as your home, car, and other necessities.

Chapter 7 is typically the fastest form of bankruptcy, often completed within four to six months. For individuals who don’t have significant assets or disposable income to pay off their debts, Chapter 7 offers a streamlined way to wipe out qualifying debts and start over. However, it’s not available to everyone—qualifying for Chapter 7 bankruptcy depends on passing a means test, which evaluates your income and expenses to ensure that Chapter 7 is appropriate for your situation.

Key Characteristics of Chapter 7 Bankruptcy

• Eliminates Unsecured Debt: Chapter 7 can discharge most unsecured debts, including credit card debt, medical bills, and personal loans. However, some debts, like student loans, child support, and recent tax debts, generally cannot be discharged.
• Asset Liquidation: While Chapter 7 is called a "liquidation" bankruptcy, many filers find that they don’t have to give up most assets due to exemptions. Each state offers its own set of exemptions, allowing you to keep essentials.
• Quick Process: Chapter 7 bankruptcy typically takes a few months from start to finish, which can be helpful for those seeking a faster resolution to their financial struggles.
• Income Requirements: You must pass the means test to qualify for Chapter 7. If your income is too high, you may not be eligible and might need to consider Chapter 13 instead.
• Impact on Credit: Like all bankruptcies, Chapter 7 will have a lasting impact on your credit. It remains on your credit report for up to 10 years, potentially affecting your ability to obtain loans, mortgages, or credit cards.

What Is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy, often referred to as a "wage earner's plan," allows individuals with a regular income to create a structured repayment plan to pay back some or all of their debts over a period of three to five years. Unlike Chapter 7, Chapter 13 does not involve liquidating assets. Instead, it enables you to catch up on missed payments and reorganize your debt, which can be particularly helpful if you’re behind on mortgage or car payments and want to keep your property.

Under Chapter 13, you make monthly payments to a bankruptcy trustee, who then distributes the funds to creditors based on a pre-approved repayment plan. Chapter 13 can offer a path for individuals who have the income to repay their debts but need time and structure to get back on track.

Key Characteristics of Chapter 13 Bankruptcy

• Debt Repayment Plan: Chapter 13 requires you to create a repayment plan, usually lasting three to five years, to pay back creditors in an organized manner. You may be able to reduce the total amount you pay if you’re unable to repay all of it.
• Protection of Assets: Unlike Chapter 7, Chapter 13 does not involve asset liquidation. This allows you to keep your home, car, and other valuable assets, provided you continue making payments as outlined in the plan.
• Flexible Payment Terms: Chapter 13 can provide flexibility in managing secured debts, allowing you to catch up on past-due payments or reorganize car and mortgage payments to make them more manageable.
• Eligibility Requirements: Chapter 13 is only available to individuals with a regular income and under specific debt limits. As of 2023, individuals must have unsecured debts less than $465,275 and secured debts less than $1,395,875 to qualify.
• Impact on Credit: Chapter 13 bankruptcy remains on your credit report for up to seven years, shorter than Chapter 7, which could be advantageous if you’re concerned about long-term credit implications.

Key Differences Between Chapter 7 and Chapter 13 Bankruptcy



While both Chapter 7 and Chapter 13 bankruptcy offer relief from overwhelming debt, they are distinct in several important ways. Here’s a comparison of the two:

The choice between Chapter 7 and Chapter 13 will depend on your unique financial circumstances. Chapter 7 may be best for those with low income and limited assets who need a quicker discharge of debt, while Chapter 13 can be more suitable for individuals with a stable income and a desire to retain their property while repaying some debts.

When Should You Consider Chapter 7 vs. Chapter 13?

Deciding between Chapter 7 and Chapter 13 depends on various factors, such as your income, assets, and the type of debt you’re facing. Here are some scenarios where each might be most appropriate:

Consider Chapter 7 if:

• You have a low income or are unemployed and cannot realistically commit to a repayment plan.
• You have minimal assets or qualify for exemptions that protect your home, car, or other valuables.
• Your debts are primarily unsecured, such as credit card debt or medical bills, that can be discharged.

Consider Chapter 13 if:

• You have a regular income and want to protect assets like your home or car.
• You have significant secured debts, such as mortgage arrears or auto loans, and need time to catch up.
• Your debt exceeds what you can pay off immediately but could be manageable with a structured repayment plan.



Before making a final decision, consulting with a bankruptcy attorney or a debt consultant can provide insight into the best path for your situation.

Getting Out of Debt with the Help of Sally

Bankruptcy can offer a lifeline for individuals facing serious financial hardship, but it’s not the only option, nor is it always the best fit for everyone. Sally, a professional debt consultant with years of experience helping individuals overcome financial obstacles, can assist you in exploring all your debt relief options.

Sally understands that every client’s financial journey is unique. Before recommending bankruptcy, she evaluates your entire financial picture to determine if there are alternative strategies available. These may include debt consolidation, settlement negotiations with creditors, or creating a customized budgeting plan to help you manage debt without filing for bankruptcy. With Sally’s help, you can also gain financial insights that empower you to avoid future debt and build a stable financial future.

If bankruptcy is ultimately the right choice, Sally can guide you through the process, helping you prepare and organize your finances. Working with a knowledgeable debt consultant can alleviate much of the stress and uncertainty associated with debt, ensuring you make the most informed decisions about your financial future.