What Are the Differences Between Chapter 7 and Chapter 13 Bankruptcy?
Bankruptcy is a legal process that allows individuals and businesses to get relief from overwhelming debt. In the United States, the two most common forms of bankruptcy for individuals are Chapter 7 and Chapter 13. Both chapters offer debt relief, but they do so in very different ways.
For Louisiana residents facing financial difficulties, understanding the key differences between these two types of bankruptcy is crucial to determining which option is best for their financial situation.
At Hoke Law Firm in Baton Rouge, Louisiana, we’ve assisted numerous clients with both Chapter 7 and Chapter 13 bankruptcy. Continue reading to learn what Chapter 7 and Chapter 13 bankruptcy are, how they work, their eligibility requirements, the advantages and disadvantages of each, and which one might be right for you.
What Is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy, often referred to as "liquidation bankruptcy," is the most common type of bankruptcy filed in the United States. It involves the liquidation of a debtor's non-exempt assets to repay creditors. In most cases, however, the debtor doesn’t have significant assets that would need to be liquidated, as certain property is exempt under state or federal law.
When an individual files for Chapter 7, a trustee is appointed by the court to oversee the case. The trustee’s primary role is to review the debtor’s assets and determine which, if any, can be sold to repay creditors.
If the debtor has non-exempt assets, they may be sold to pay off as much of the debt as possible. However, many debtors are able to keep their property because the exemptions available in Louisiana allow individuals to retain certain assets, such as their home, car, and personal belongings.
Once the liquidation process is complete, the debtor is typically granted a "discharge" of qualifying debts. This means that the debtor is no longer legally required to pay those debts. Common debts that can be discharged in Chapter 7 bankruptcy include credit card debt, medical bills, personal loans, and certain judgments.
What Is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is often referred to as a "reorganization bankruptcy." Unlike Chapter 7, which involves the liquidation of assets, Chapter 13 allows individuals to reorganize their debts and create a repayment plan to pay off creditors over a period of three to five years.
Chapter 13 bankruptcy is primarily intended for individuals who have a regular income but are struggling to keep up with their debt payments.
In a Chapter 13 bankruptcy, the debtor proposes a repayment plan to the court, which outlines how much they’ll pay each month, as well as how long they’ll continue making payments. This plan is based on the debtor’s income, expenses, and the amount of unsecured and secured debt they owe.
The goal of the repayment plan is to allow the debtor to pay off as much of their debt as possible within the designated time frame, while also keeping their assets.
One of the key features of Chapter 13 is that it allows debtors to catch up on missed mortgage payments, car loans, and other secured debts, potentially avoiding foreclosure or repossession. If the debtor successfully completes the repayment plan, any remaining unsecured debt can be discharged, providing a fresh financial start.
Key Differences Between Chapter 7 and Chapter 13 Bankruptcy
Now that we have an understanding of what Chapter 7 and Chapter 13 bankruptcy are, let's take a closer look at the key differences between them:
Eligibility Requirements
The eligibility requirements for Chapter 7 and Chapter 13 bankruptcy are different, and this is one of the primary factors that individuals must consider when choosing which type of bankruptcy to file.
Chapter 7 Eligibility:
To file for Chapter 7 bankruptcy, an individual must pass a "means test." The means test compares the debtor’s income to the median income in Louisiana for a household of their size.
If the debtor’s income is below the median, they’re eligible to file for Chapter 7. However, if their income is above the median, they may be required to submit additional financial information, and their eligibility will be evaluated based on their ability to repay their debts.
Chapter 13 Eligibility:
In contrast to Chapter 7, there’s no income requirement for Chapter 13 bankruptcy. However, there are debt limits.
As of 2025, individuals can file for Chapter 13 bankruptcy if their unsecured debts (e.g., credit card balances, medical bills) are less than $465,275, and their secured debts (e.g., mortgage, car loans) are less than $1,395,875. These limits are adjusted periodically, so it’s important to check the current thresholds before deciding to file for Chapter 13.
Length of the Bankruptcy Process
The length of the bankruptcy process varies depending on whether an individual files for Chapter 7 or Chapter 13.
Chapter 7:
Chapter 7 bankruptcy is typically completed much faster than Chapter 13. In most cases, the entire process takes about three to six months from the date of filing to the discharge of debts. This makes Chapter 7 a quicker option for those who want to resolve their debt issues and start fresh.
Chapter 13:
Chapter 13 bankruptcy takes much longer. The repayment plan typically lasts three to five years, depending on the debtor’s income and the amount of debt they owe. During this time, the debtor must make monthly payments to the trustee, who distributes the funds to creditors. At the end of the repayment period, the remaining unsecured debt may be discharged.
Asset Liquidation
A significant difference between Chapter 7 and Chapter 13 is how they treat the debtor’s assets.
Chapter 7:
In Chapter 7, the debtor’s non-exempt assets may be sold to pay creditors. However, many debtors don’t have significant non-exempt assets, meaning they can keep most or all of their property.
Louisiana has its own set of exemptions that allow individuals to keep certain property, such as their primary residence, a vehicle, and personal belongings. If the debtor has exempt property, they won’t lose it during the bankruptcy process.
Chapter 13:
In Chapter 13, there’s no liquidation of assets. The debtor is allowed to keep all of their property, as long as they can continue to make payments under the repayment plan. The debtor may be required to pay back creditors through the plan based on the value of their non-exempt property.
Debt Discharge
Both Chapter 7 and Chapter 13 provide the possibility of a debt discharge, but the scope of what can be discharged is different.
Chapter 7:
In Chapter 7, most unsecured debts, such as credit card balances, medical bills, and personal loans, can be discharged. However, certain types of debts aren’t dischargeable in Chapter 7, including student loans, child support, alimony, and certain tax debts. Additionally, if the debtor has committed fraud or other illegal activities, some debts may not be discharged.
Chapter 13:
In Chapter 13, unsecured debts are only discharged after the debtor successfully completes the repayment plan. If the debtor fails to make payments or defaults on the plan, they may not receive a discharge of their debts.
Secured debts, such as mortgages and car loans, aren’t fully discharged in Chapter 13, but the debtor can catch up on missed payments and may be able to reduce the total amount owed on these debts through the plan.
Impact on Credit
Both Chapter 7 and Chapter 13 bankruptcy have an impact on the debtor’s credit, but the effects are different.
Chapter 7:
Chapter 7 bankruptcy has a more significant negative impact on credit because it involves the liquidation of assets and the discharge of most debts. It can remain on the debtor’s credit report for up to 10 years, making it harder to obtain credit in the future.
However, for individuals who are overwhelmed by debt and need a fresh start, the benefits of discharging debts may outweigh the long-term impact on their credit score.
Chapter 13:
Chapter 13 bankruptcy stays on the debtor’s credit report for up to seven years. While it still negatively impacts the credit score, the fact that the debtor is making regular payments toward their debts may be viewed more favorably by lenders than a Chapter 7 filing.
Some individuals may be able to rebuild their credit more quickly after Chapter 13, especially if they stick to their repayment plan and avoid accruing additional debt.
Foreclosure and Repossession
Chapter 13 bankruptcy is particularly beneficial for individuals who are facing foreclosure or repossession.
Chapter 7:
In Chapter 7, the automatic stay temporarily halts foreclosure and repossession actions, but it doesn’t provide a long-term solution. If the debtor can’t make their mortgage payments or catch up on missed payments, the foreclosure process can resume once the bankruptcy is completed.
Chapter 13:
In Chapter 13, the automatic stay also halts foreclosure and repossession. However, Chapter 13 provides a unique advantage because it allows debtors to reorganize their debts and include missed mortgage payments in their repayment plan. This gives individuals more time to catch up on mortgages and car payments as needed.
Which Option Is Right for You?
Choosing between Chapter 7 and Chapter 13 bankruptcy depends on your financial situation, income, assets, and goals.
Chapter 7 may be the best option if you have little to no income, limited assets, and want to eliminate most of your unsecured debts quickly. On the other hand, Chapter 13 may be a better fit if you have a steady income, are behind on mortgage or car payments, and want to keep your property while repaying your debts over time.
If you’re unsure which type of bankruptcy is right for you, it’s essential to consult with an experienced bankruptcy attorney who can help you assess your financial situation and guide you through the process.
Contact a Bankruptcy Attorney for Assistance
If you think bankruptcy is the right next step for you, Hoke Law Firm is here to help throughout every step of the process. We serve Baton Rouge, Louisiana, and the neighboring areas of New Orleans and Lafayette. Contact us today to start exploring your options for rebuilding your finances.