Chapter 7 vs Chapter 13 Bankruptcy: Which One Saves You More?

Chapter 7 is a liquidation bankruptcy that discharges most unsecured debts (credit cards, medical bills, personal loans) in 3-6 months. A trustee reviews your assets and may liquidate non-exempt property to pay creditors, though most Chapter 7 cases are 'no-asset' cases where everything is protected by exemptions. Chapter 13 is a reorganization where you repay some or all of your debts through a 3-5 year court-supervised plan. You keep all your assets but must commit your disposable income to the plan. Chapter 7 is faster and simpler; Chapter 13 is more expensive but preserves assets and can handle debts Chapter 7 cannot.

You can choose either chapter as long as you meet the eligibility requirements. Chapter 7 requires passing the means test — if your income exceeds your state median, you must complete the full disposable income calculation. Chapter 13 has debt limits (secured and unsecured debt cannot exceed certain thresholds, currently about $2.75 million combined). If your income is too high for Chapter 7, Chapter 13 is your primary option. If your income qualifies you for Chapter 7 but you have assets to protect or arrears to cure, you may voluntarily choose Chapter 13 instead.

It depends on your situation. Chapter 7 is almost always cheaper on a simple cost basis: attorney fees of $1,000-$2,500 and a $338 filing fee, with the case resolved in months. Chapter 13 involves attorney fees of $3,000-$5,000, a $313 filing fee, trustee fees of approximately 10% of all plan payments, and 3-5 years of monthly plan payments. However, Chapter 13 can be the better financial outcome if it saves a home worth $200,000 in equity, cures arrears that would otherwise lead to foreclosure, or discharges debts that Chapter 7 cannot touch. The calculator computes total five-year cost and benefit for both chapters to give you a true comparison.

Chapter 7 does not address mortgage arrears at all. The automatic stay stops foreclosure temporarily, but once the stay lifts (after discharge or relief from stay), the lender can proceed. If you are behind on your mortgage and file Chapter 7, you will likely lose the home unless you can bring payments current immediately. Chapter 13 was specifically designed for this situation: it allows you to cure arrears over the length of the plan (up to 5 years) while making current mortgage payments separately. The automatic stay remains in effect throughout the plan as long as you make payments. Curing mortgage arrears through Chapter 13 is one of its primary advantages over Chapter 7.

Chapter 7 is safe for your home if: your equity is within your state homestead exemption AND you are current on mortgage payments. If either condition is not met, Chapter 13 is better. Chapter 13 can: cure mortgage arrears (protecting you from foreclosure), allow you to keep the home even if equity exceeds the exemption (by paying the at-risk equity into the plan), and strip wholly unsecured junior liens (second mortgages or HELOCs where home value is below the first mortgage balance). If your primary concern is keeping your home and you have arrears or excess equity, Chapter 13 is almost always the right choice.