Chapter 7 or Chapter 13 Bankruptcy: Which One Is Right for Me?

Read this in: Español

Bankruptcy is a legal process where a federal court helps you deal with debt you cannot pay. There are two main types most people use: Chapter 7 and Chapter 13. They work very differently.

The right one for you depends on your income, what you own, and what you are trying to accomplish.

Talk to a lawyer before you file. Bankruptcy has many rules. Small mistakes can cost you property or get your case dismissed. A lawyer can help you avoid those mistakes.

Free legal help may be available: Call 866-LEGLAID (866-534-5243) or visit virginialawhelp.org/get-legal-help to find a legal aid office in your area.
You can also search for a bankruptcy lawyer using the National Association of Consumer Advocates (NACA) tool: consumeradvocates.org/findanattorney. Under "area of practice," select "bankruptcy" from the drop-down menu.

This article is a general overview to help you understand the basics of bankruptcy so you feel more prepared when you speak with a lawyer. Every situation is different. Please talk to a lawyer about your specific case.

What is a bankruptcy discharge?

A bankruptcy discharge wipes out most of your debts completely. When the final order is entered, you no longer legally owe those debts.

What does each type of bankruptcy do?

Chapter 7: "Liquidation"

In a Chapter 7 bankruptcy, you trade any property that is not legally protected in exchange for a discharge of your debts. A court official called a trustee looks at what you own. If you have valuable things that are not legally protected, the trustee could sell them to pay creditors (the people or companies you owe money to). This is why Chapter 7 is sometimes called a "liquidation," because the trustee can sell or "liquidate" unprotected assets.

That said, Virginia law protects most common belongings. Most people who are income-eligible for legal aid and file Chapter 7 keep everything they own.

Chapter 7 moves relatively quickly compared to Chapter 13. It usually takes about 6 months.

Chapter 13: "Create a repayment plan"

In a Chapter 13 bankruptcy, your debts are not wiped out right away. Instead, you make a plan to pay back some or all of what you owe over 3 to 5 years. After you complete the plan, the qualifying debts that are left are discharged.

In Chapter 13, you keep all your property from the start. The court looks at your income and expenses to set your monthly payment. You make that payment to a trustee each month, and the trustee pays your creditors. Some folks call this type of bankruptcy a “reorganization.”

Which one sounds like your situation?

Read through the situations below. Most people will clearly fit one column better than the other.

Chapter 7 may be right for you if...

Your income is low or you are unemployed
You mainly have credit card debt, medical bills, or payday loans
You do not own a home or you rent
You do have a home, but either (a) you have relatively little equity in the home OR (b) you own this home with a spouse and most of your debts are only owned by one spouse, not both
You want your debts resolved as quickly as possible
You do not have a lot of property beyond basic necessities
You are receiving Social Security, SSI, or other fixed income

Chapter 13 may be right for you if...

Your income is too high to qualify for Chapter 7
You own your home, have significant equity in it, are not sufficiently protected by a tenancy by the entireties status, and you want to keep your home
You have fallen behind on mortgage payments
You have significant equity in your home that you could not fully protect in a Chapter 7
You have a car loan you are behind on and want to catch up
You want to pay off certain debts, like back taxes or child support arrears, over time with court protection
You filed Chapter 7 too recently to file again

What if I'm not sure which one fits?

That is completely normal. Many people's situations have elements of both. Here are some common questions:

My income feels too high for Chapter 7. Am I stuck with Chapter 13?

Not necessarily. Chapter 7 has an income limit, but it is based on your household size and actual expenses. It is not just about your gross income. Many people with moderate incomes still qualify after the full calculation. A bankruptcy lawyer can run the numbers.

Read: Do I Qualify for Chapter 7 Bankruptcy in Virginia? This explains the income test in more detail.

I own a home. How can I protect it?

It mainly depends on how much equity you have in your home. Equity is the difference between what your home is worth and what you still owe on it.

Virginia gives homeowners a "homestead exemption.” This is a set amount of home equity that is protected in Chapter 7.

If your equity is within that limit, Chapter 7 can work. If your equity is above the limit, Chapter 13 lets you keep the home if you pay back the unprotected amount to creditors over time through a repayment plan.

Married couples have another way to protect equity. Married couples can be on the deed to their land as “tenants by the entirety.” If that is the case, then creditors of only one spouse may not take the house. This is an important consideration when married couples consider filing for bankruptcy protection.

Read: What Property Can I Keep if I File Chapter 7 in Virginia? This covers exemptions, including the homestead exemption.

I am behind on my mortgage. Which chapter helps?

Chapter 13 is generally the better option if you want to save your home from foreclosure. It lets you catch up on missed mortgage payments over your repayment plan. Chapter 7 stops foreclosure temporarily through the automatic stay, but does not give you a way to catch up on missed payments. Without more, the mortgage company can file for relief from stay and foreclose.

I just need the debt collection to stop. Which chapter does that fastest?

Both chapters stop collection activity immediately on the day you file. This is called the "automatic stay."

If stopping garnishment or calls is your most urgent need, either chapter gets you that protection right away. Chapter 7 then resolves everything much faster, but with potential loss of assets if you have any non-exempt property. This is why it is important to check with a bankruptcy lawyer.

Read: Can Bankruptcy Stop My Wage Garnishment? This explains exactly how the automatic stay works.

I have no income and nothing to lose. Does bankruptcy even help me?

It depends. If all your income and property is legally protected, you may be what's called "collection proof". This means creditors cannot legally take anything from you anyway. In that case, bankruptcy may not add much.

But bankruptcy also stops future lawsuits and wipes out debt permanently so it cannot grow or follow you later. A free consultation with a lawyer can help you decide whether filing makes sense in your situation.

What if I do not qualify for Chapter 7?

There is no situation where you have too many assets to file for bankruptcy at all. If you cannot file Chapter 7, you can almost always file Chapter 13. Chapter 13 has no income ceiling and is available to anyone with a regular income who wants court protection to pay their debts over time.

Are there other Chapters?

Yes, there are other chapters, each dealing with specific areas. These articles cover Chapter 7 and Chapter 13, which are the two types of bankruptcy most commonly used by individuals.

Family farmers and fishermen, high-net-worth individuals, businesses, or people that owe debts in more than one country all have different chapters. Talk to a bankruptcy lawyer about your options.

What should I do next?

The single most useful thing you can do right now is talk to a bankruptcy lawyer. They can look at your specific income, debts, and property and tell you exactly which chapter makes sense, and whether you even need to file at all. Most private lawyers will give you a free consultation to discuss whether bankruptcy is right for you.

Free legal help may be available: Call 866-LEGLAID (866-534-5243) or visit virginialawhelp.org/get-legal-help to find a legal aid office in your area.
You can also search for a bankruptcy lawyer using the National Association of Consumer Advocates (NACA) tool: consumeradvocates.org/findanattorney. Under "area of practice," select "bankruptcy" from the drop-down menu. Many offer free consultations.

What should I be aware of when hiring a bankruptcy lawyer?

Be sure to ask about all costs before you hire anyone. In Virginia, bankruptcy costs likely include a filing fee, a recording fee, and the lawyer's own fees.

Some lawyers quote only their own fees, without including court costs. Other lawyers quote the full package. The only way to compare prices fairly is to ask each firm for the full cost breakdown. That way you are comparing the same things.

Understanding the full costs is essential to making an informed decision.

For information on how to select a bankruptcy lawyer and how to prepare for your first meeting, see the NCLC’s “Surviving Debt” guide.