What Are Chapter 7 and Chapter 13?
Chapter 7 is often called "liquidation" bankruptcy. In Chapter 7, a debtor gives up non-exempt property to a trustee, who sells it and distributes the proceeds to creditors. In exchange, most remaining dischargeable debts are wiped out. Chapter 7 cases generally take three to four months from filing to discharge.
Chapter 13 is called "reorganization" or "adjustment of debts." Instead of surrendering assets, a debtor keeps property and proposes a repayment plan that lasts three to five years. Monthly payments are made to a trustee, who distributes the money to creditors according to the plan. At the end of the plan, if all required payments have been made, the debtor receives a discharge of remaining eligible debts.
Speed and Complexity
Chapter 7 cases move quickly—most are completed in a few months. Debtors attend one meeting with the trustee. If there are no complications, they receive a discharge soon after.
Chapter 13 cases are more complex and take much longer. Debtors must propose a detailed repayment plan. They attend a confirmation hearing. They make monthly payments for three to five years. Debtors remain under court supervision during the entire plan period.
Protecting a Home from Foreclosure
When a debtor faces foreclosure, the two chapters offer different tools.
Chapter 7 temporarily stops foreclosure through the "automatic stay." This legal order goes into effect when a case is filed. However, Chapter 7 does not provide a mechanism to catch up on missed mortgage payments. If a debtor is behind on mortgage payments, the lender can ask the court to lift the stay and proceed with foreclosure. A home can be retained in Chapter 7 generally only if the debtor is current on payments and the equity in the home is fully protected by the state's homestead exemption.
Chapter 13 also triggers the automatic stay. In addition, a Chapter 13 repayment plan can include provisions to cure mortgage arrears. This means the debtor can catch up on missed payments over the life of the plan while making regular ongoing mortgage payments. This makes Chapter 13 a tool some debtors use to stop foreclosure and retain a home when regular income is available. Whether this approach is appropriate for a particular debtor depends on many factors and requires consultation with a bankruptcy attorney.
The Means Test and Eligibility
The means test is a calculation used to determine whether a debtor qualifies for Chapter 7 or must file Chapter 13 instead.
Chapter 7 means test: To file Chapter 7, a debtor's income must be below a certain threshold. Alternatively, the debtor must show that there is not enough disposable income to repay a significant portion of debts. The means test compares the debtor's "current monthly income" to the median income in the debtor's state for a household of the debtor's size. Current monthly income is the average monthly income over the six months before filing.
If the debtor's income is above the median, the test examines allowable expenses and deductions. It calculates disposable income over the next 60 months. If that amount is high enough to repay a meaningful portion of unsecured debt, the court may presume that filing Chapter 7 would be an "abuse" of the bankruptcy system. The case may be dismissed or the debtor may be required to convert to Chapter 13.
Chapter 13 means test: Chapter 13 does not use the means test to determine eligibility. Instead, it uses the test to determine how long the repayment plan must last and how much must be paid. If the debtor's income is below the state median, the plan can be three years. If above, it must be five years. The means test calculation also helps determine the debtor's "disposable income." This is the amount that must be paid to unsecured creditors under the plan.
In short: the means test can block a debtor from Chapter 7 if income is too high. It shapes the Chapter 13 plan if the debtor chooses or is required to file under Chapter 13.
Impact on Those with Significant vs. Minimal Assets
Debtors with significant non-exempt assets: Chapter 7 may result in the trustee selling non-exempt property to pay creditors. Chapter 13 allows debtors to keep all property, including non-exempt assets. The repayment plan must pay unsecured creditors at least as much as they would have received in a Chapter 7 liquidation. Whether Chapter 13 is preferable depends on the debtor's income, assets, and long-term financial circumstances. This determination requires consultation with a bankruptcy attorney.
Debtors with few or no non-exempt assets: Chapter 7 is often faster and simpler. If everything owned is protected by exemptions, the trustee will have nothing to sell. The debtor will receive a quick discharge.
Flexibility of Chapter 13 Plans: Modification, Dismissal, and Conversion
Chapter 13 plans are not set in stone. Life changes, and the law recognizes that.
Modification: A debtor can ask the court to modify a confirmed plan if circumstances change. Examples include losing a job, income dropping, or unexpected expenses arising. The court can approve a modified plan that reduces the monthly payment or extends the plan period. The plan is subject to the three- or five-year maximum.
Dismissal: If a debtor cannot complete the plan, the debtor can ask the court to dismiss the case. Dismissal ends the bankruptcy, but it also means the debtor does not receive a discharge. Debts remain, and creditors can resume collection efforts. Dismissal is voluntary. However, the court or trustee can also move to dismiss the case if the debtor fails to make payments or comply with plan terms.
Conversion to Chapter 7: If a debtor encounters financial hardship and cannot continue with Chapter 13, the debtor has the right to convert the case to Chapter 7. The debtor must be eligible for Chapter 7 relief. This means the debtor must satisfy the means test and other requirements. Conversion allows the debtor to switch to liquidation if repayment becomes impossible. However, any non-exempt assets the debtor acquired or accumulated during the Chapter 13 case could be liquidated by the Chapter 7 trustee.
Summary
| Feature | Chapter 7 | Chapter 13 |
|---|---|---|
| Duration | 3–4 months | 3–5 years |
| Complexity | Simple | More complex |
| Property | Non-exempt property liquidated | Keep all property; pay plan instead |
| Home foreclosure | Temporary stay; no cure mechanism | Can cure arrears through plan |
| Means test role | Determines eligibility (can block filing) | Determines plan length and payment amount |
| Best for | Low income, few assets, need quick relief | Regular income, want to keep property, catch up on debts |
| Plan modification | N/A | Possible if circumstances change |
| Conversion | Can convert to Chapter 13 with consent | Can convert to Chapter 7 if eligible |