What Is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?

When bills pile up and you can't keep up with payments, bankruptcy might be your best option for a fresh start. Many people facing financial hardship don't know which type of bankruptcy would work better for their situation. Understanding the key differences can help you make the right choice.

The main difference between Chapter 7 and Chapter 13 bankruptcy is how they handle debt. Chapter 7 is a liquidation bankruptcy that wipes out most unsecured debts in 3-6 months but may require selling some assets. Chapter 13 is a reorganization bankruptcy that creates a 3-5 year repayment plan to pay back some debts while keeping all your property. Chapter 7 is better for those with limited income and few assets, while Chapter 13 works best for those with steady income who want to keep their property or catch up on mortgage payments.

Making the wrong choice could cost you time and money or even leave you without the debt relief you need. This guide breaks down what you need to know about both types of bankruptcy to help you decide which one might be right for your situation.

Chapter 7 Bankruptcy: The Basics

What Is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is often called "liquidation" or "straight" bankruptcy. It's the most common type of personal bankruptcy in the United States. In Chapter 7:

• Most unsecured debts get wiped out completely

• The process typically takes 3-6 months

• You get immediate relief from collection calls and lawsuits

• A court-appointed trustee may sell some of your property to pay creditors

Chapter 7 offers the quickest path to debt freedom, but it's not the right choice for everyone.

Who Qualifies for Chapter 7?

Not everyone can file for Chapter 7 bankruptcy. To qualify:

• You must pass a "means test" showing your income is below your state's median income for your household size, or

• If your income is higher, you must show you don't have enough disposable income to repay debts after covering necessary expenses

• You cannot have received a Chapter 7 discharge in the last 8 years

• You cannot have had a bankruptcy case dismissed in the last 180 days for specific reasons

Ohio has its own specific income limits that determine eligibility. A bankruptcy attorney can help you figure out if you qualify.

What Debts Can Be Discharged in Chapter 7?

Chapter 7 can eliminate many common debts, including:

• Credit card debt

• Medical bills

• Personal loans

• Old utility bills

• Old rent payments

• Some older tax debts

• Payday loans

• Business debts

However, some debts cannot be discharged, including:

• Recent tax debts (generally less than 3 years old)

• Child support and alimony

• Student loans (with rare exceptions)

• Court fines and penalties

• Debts from fraud or intentional wrongdoing

• Most secured debts (unless you surrender the collateral)

What Property Can You Keep in Chapter 7?

Many people worry they'll lose everything in Chapter 7, but that's not usually true. Bankruptcy exemptions protect many types of property, including:

• Some home equity (in Ohio, up to $145,425 per person)

• Cars (in Ohio, up to $4,000 in equity)

• Household goods and clothing

• Tools needed for your job

• Some retirement accounts

• Public benefits

In Ohio, you can choose between state exemptions or federal exemptions, whichever protects more of your property. Property not covered by exemptions can be sold by the trustee to pay creditors.

Pros and Cons of Chapter 7

Pros:

• Quick process (usually 3-6 months)

• Eliminates most unsecured debts completely

• No repayment plan required

• Fresh start sooner

• Lower attorney fees than Chapter 13

Cons:

• Risk of losing non-exempt property

• Not everyone qualifies (income restrictions)

• Can't stop foreclosure or repossession long-term

• Stays on your credit report for 10 years

• Can't file again for 8 years

Chapter 13 Bankruptcy: The Basics

What Is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy is called a "reorganization" or "wage earner's plan." Rather than wiping out debts right away, it creates a structured plan to repay some or all of what you owe. In Chapter 13:

• You make monthly payments for 3-5 years according to a court-approved plan

• You keep all of your property

• You can catch up on missed mortgage or car payments

• Some debts may be reduced or partially forgiven

Chapter 13 works well for people with regular income who need time to catch up on payments.

Who Qualifies for Chapter 13?

Chapter 13 has different eligibility requirements than Chapter 7:

• You must have regular income

• Your unsecured debts must be less than $465,275

• Your secured debts must be less than $1,395,875

• You must be current on tax filings

• You cannot have had a Chapter 13 case dismissed in the last 180 days for specific reasons

• Individuals and sole proprietors can file (corporations and partnerships cannot)

Unlike Chapter 7, there's no means test for Chapter 13. People with higher incomes who don't qualify for Chapter 7 often turn to Chapter 13.

How the Chapter 13 Repayment Plan Works

The core of Chapter 13 is the repayment plan. Here's how it works:

• The plan lasts 3 years if your income is below your state's median, or 5 years if it's above

• You make one monthly payment to a trustee, who distributes it to creditors

• Priority debts (like taxes and child support) must be paid in full

• Secured debts (like mortgages and car loans) must be kept current

• Unsecured debts (like credit cards) may be paid partially or in full, depending on your disposable income and non-exempt assets

At the end of your plan, any remaining dischargeable unsecured debt is wiped out.

What Happens to Your Property in Chapter 13?

One big advantage of Chapter 13 is that you keep all your property. Since you're agreeing to repay debts through your plan, the trustee doesn't sell your assets.

Chapter 13 can also help you:

• Stop foreclosure and catch up on missed mortgage payments

• Prevent car repossession and catch up on car loans

• In some cases, reduce what you owe on certain secured debts

• Remove some liens from your property

Pros and Cons of Chapter 13

Pros:

• Keep all your property

• Stop foreclosure and catch up on mortgage

• Protect co-signers from collection

• More debts can be discharged than in Chapter 7

• Can file again sooner than Chapter 7

• Stays on credit report for 7 years (vs. 10 for Chapter 7)

Cons:

• Longer process (3-5 years)

• Must make regular payments

• Higher attorney fees than Chapter 7

• Must stick to a strict budget during the plan

• Fail to complete the plan and your case might be dismissed or converted to Chapter 7

Direct Comparison: Chapter 7 vs. Chapter 13

Time Frame Differences

Chapter 7:

• Typically completes in 3-6 months

• Discharge usually granted 60-90 days after the 341 meeting (creditors' meeting)

• Immediate relief from most debts

Chapter 13:

• Plan lasts 3-5 years

• Must make payments for the entire plan period

• Discharge granted after completing all plan payments

Cost Differences

Chapter 7:

• Court filing fee: $338

• Attorney fees: Usually $1,000-$2,500 (typically paid upfront)

• Credit counseling courses: About $50

Chapter 13:

• Court filing fee: $313

• Attorney fees: Usually $3,000-$5,000 (often included in the repayment plan)

• Credit counseling courses: About $50

• Trustee commission: Up to 10% of your plan payments

Credit Impact Differences

Chapter 7:

• Stays on credit report for 10 years

• Often drops credit score by 130-200 points initially

• Most people can begin rebuilding credit immediately

• Many see credit scores of 650+ within 2 years

Chapter 13:

• Stays on credit report for 7 years

• Often drops credit score by 130-150 points initially

• Credit score may improve during repayment plan if payments are made on time

• Lenders may view Chapter 13 more favorably than Chapter 7

Which Is Better for Keeping Your Home?

Chapter 7:

• Can temporarily delay foreclosure (usually 3-4 months)

• Cannot catch up on missed payments through the bankruptcy

• Home equity must be covered by exemptions or it could be at risk

• Good option if you're current on payments and have little equity

Chapter 13:

• Stops foreclosure immediately

• Allows you to catch up on missed payments over 3-5 years

• Keeps your home safe regardless of equity (as long as you make plan payments)

• Sometimes allows you to remove second mortgages if your home is underwater

Which Is Better for Keeping Your Car?

Chapter 7:

• Must be current on payments or risk repossession

• May be able to "redeem" the vehicle by paying its current value in one lump sum

• Can "surrender" the car and eliminate the debt

Chapter 13:

• Can catch up on missed payments through your plan

• May be able to reduce the loan amount to the car's current value ("cramdown") if the loan is at least 910 days old

• Protects the car from repossession as long as you make plan payments

How to Choose Between Chapter 7 and Chapter 13

When Chapter 7 Makes More Sense

Chapter 7 might be the better choice if:

• You have mostly unsecured debts (credit cards, medical bills)

• You don't own a home or have little equity in your home

• Your income is limited or unstable

• You don't have valuable non-exempt property

• You need quick relief from debts

• You're behind on credit cards but current on secured debts

When Chapter 13 Makes More Sense

Chapter 13 might be the better choice if:

• You're behind on your mortgage and want to keep your home

• You have substantial equity in your property that isn't exempt

• You have tax debts, student loans, or other non-dischargeable debts

• You need to protect a co-signer

• Your income is too high to qualify for Chapter 7

• You've received a Chapter 7 discharge in the last 8 years

• You have car loans or other secured debts you want to restructure

Special Situations to Consider

If you're facing foreclosure: Chapter 13 is usually better as it stops foreclosure and gives you time to catch up.

If you have lots of equity in your home: Chapter 13 protects all equity, while Chapter 7 only protects exempt amounts.

If you have co-signers: Chapter 13 protects co-signers through the "co-debtor stay," while Chapter 7 doesn't.

If you've filed bankruptcy before: Time limits between filings may determine your options.

Life After Bankruptcy: Rebuilding Your Finances

Rebuilding Credit After Chapter 7

After Chapter 7:

• Your credit score may begin improving within 1 year

• You can get secured credit cards right away

• You may qualify for FHA home loans after 2 years

• Many people reach 650+ credit scores within 2-3 years

Tips for rebuilding:

• Get a secured credit card

• Consider a credit-builder loan

• Always pay bills on time

• Keep balances low on any new credit

• Review your credit reports regularly

Rebuilding Credit After Chapter 13

After Chapter 13:

• Credit rebuilding can start during your repayment plan

• Making plan payments on time helps rebuild credit

• Some lenders view completed Chapter 13 more favorably

• With good habits, many reach 700+ scores within 2 years of discharge

Tips for rebuilding:

• Make all plan payments on time

• Start with small amounts of new credit

• Pay all new debts on time and in full

• Keep your debt-to-income ratio low

• Follow a budget to avoid new financial problems

Get Expert Help with Your Bankruptcy Decision

Choosing between Chapter 7 and Chapter 13 bankruptcy is a big decision that affects your financial future. The right choice depends on your specific situation - your income, debts, property, and goals.

Don't make this decision alone. Christopher Gallutia, Attorney at Law, has helped hundreds of families throughout Central Ohio find the best path to financial freedom. We'll take the time to understand your unique situation and help you choose the bankruptcy option that best protects your future.

Our bankruptcy services include:

• Free initial consultations

• Clear explanation of all your options

• Help with every bankruptcy form

• Representation at all court meetings

• Protection from creditor harassment

• Ongoing support throughout the process

Beyond bankruptcy, we also offer Credit and Debt Counseling and Tax Resolution services to address all aspects of your financial challenges.

We proudly serve clients throughout Central Ohio and the greater Columbus area, including Reynoldsburg, Blacklick, Pickerington, Pataskala, Whitehall, Gahanna, Brice, and beyond.

Take the first step toward financial freedom today. Call Christopher Gallutia, Attorney at Law for your free, no-obligation bankruptcy consultation. Your fresh start is just a phone call away.

Conclusion

Chapter 7 and Chapter 13 bankruptcy both offer paths to a fresh financial start, but they work in very different ways. Chapter 7 provides quick relief by wiping out most debts in months, while Chapter 13 creates a 3-5 year plan to repay some debts while protecting your property. The right choice depends on your income, what you own, what you owe, and your long-term goals.