Chapter 7 Bankruptcy vs. Chapter 13 Bankruptcy

The two most common kinds of bankruptcy that individuals use to seek protection from creditors are Chapter 7 and Chapter 13 bankruptcy. 

These two options have some things in common, and several features that are different.

In this post, we examine the similarities and differences between Chapter 7 bankruptcy and Chapter 13 bankruptcy to help you gain a clear understanding of how they work and which might be your best choice if you need to file for bankruptcy in Arizona.

If you need help deciding between Chapter 7 and Chapter 13 bankruptcy, please call Stone Rose Law at (480) 739-2448 to get in touch with an experienced Arizona bankruptcy attorney.

What Are the Similarities Between Chapter 7 and Chapter 13?

Some features of bankruptcy protection are the same if you choose either Chapter 7 or Chapter 13 under the U.S. Bankruptcy Code.

These include:

• Both feature an automatic stay. This keeps creditors and debt collectors from contacting you to collect debts, and stops repossession actions, garnishments, and debt collection lawsuits.
• Both will discharge some or all of your debts. Unsecured debts like medical bills, credit cards, and personal loans, and secured debts (debts for which the creditor has a lien or other security interest in collateral) can be discharged under either form of bankruptcy. Neither Chapter 7 nor Chapter 13 requires repayment of all your outstanding debts.
• Both require you to complete educational courses. You must complete a credit counseling course before you file your petition, and complete a financial management course before your debts can be discharged.
• Both will trigger a credit recovery upon filing. As quickly as one year, you can have a “good” credit score after filing. This occurs regardless of the timeline difference between both Chapters. 

What are the Main Differences Between Chapter 7 and Chapter 13?

One important difference between Chapter 7 bankruptcy and Chapter 13 bankruptcy is how they discharge debts.

• Chapter 7 bankruptcy discharges unsecured and secured debts by eliminating them through the bankruptcy court’s discharge order. This is usually accomplished within four to six months from the time you file your bankruptcy petition with the court.
• Chapter 13 discharges debt through a debt repayment plan. This plan usually takes about three to five years to complete before the balance of the remaining debt is discharged. Chapter 13 discharges unsecured debts while allowing you to catch up on secured debts like your home or your car.

Another key difference between these two bankruptcy forms is how they treat your ability to keep your property and assets.

• Chapter 7 bankruptcy is also known as liquidation bankruptcy. Your nonexempt property and assets are liquidated. These are sold in a bankruptcy trustee sale, and the proceeds go to pay your creditors. If funds from the trustee sale are not enough to cover all of your dischargeable debts, then your obligation to pay any remaining portion of those debts is eliminated.
• Chapter 13 does not liquidate any of your assets. You are required to pay the amount that could have been liquidated in a Chapter 7 to your unsecured creditors during the term of your bankruptcy. 

Other significant differences include:

• Chapter 7 bankruptcy is often used by lower income individuals with little to no assets while Chapter 13 is often used for individuals with higher income and more assets.
• Chapter 7 involves a means test to qualify. If you have too much income to pass the Chapter 7 means test, you can use Chapter 13 instead.
• There is no dollar limit on the amount of debt you can discharge under Chapter 7, while under Chapter 13 you can discharge a maximum of $526,700 of unsecured debt and $1,580,125 of secured debt.

Specific Examples of How Chapter 7 and Chapter 13 Bankruptcy are Different

What follows are some more detailed treatments of the differences between Chapter 7 and Chapter 13.

Eligibility Criteria

To qualify for Chapter 7 bankruptcy, you need to pass the means test. Whether you need to take the means test depends on your income compared to the median income in your state.

In Arizona, for Chapter 7 petitions filed after April 1, 2025, the median annual income is:

Annual Median Income	Median Monthly Income
$70,919 for one person	$5,910
$85,476 for a two-person household	$7,123
$102,909 for a family of three	$8,576
$113,286 for a family of four	$9,441

For each additional family member after four, add $9,900 to the family of four amounts above.

The bankruptcy court will consider your average household monthly income for the six months before you file your Chapter 7 petition. If you are married this includes you and your spouse’s income even if one person is not filing.

• If your household monthly gross income is below the median income level during this period, then you do not need to pass the means test.
• If your monthly income exceeds the Arizona median, you must take the means test using Bankruptcy Form 122-A. This form considers your current monthly income, assets, and expenses to calculate whether you have enough money to pay your creditors.

If your monthly expenses exceed your monthly income, you will qualify for Chapter 7.

If you do not pass the means test, you will usually be ineligible to use Chapter 7, but you may still attempt to qualify by showing exceptional circumstances. 

Otherwise, you can file for Chapter 13 bankruptcy if you have regular income and your total secured and unsecured debts are less than your unsecured and secured debt maximums on the date you file for bankruptcy.

Treatment of Unsecured Creditors

Chapter 7 will completely discharge unsecured debts except for spousal and child support payments, certain legal judgments, most taxes, and most student loans. These kinds of debts will usually remain after the closure of your case.

Under Chapter 13, your unsecured debts will fall into two categories: priority and general.

• Priority unsecured debts include support obligations, most tax debts, restitution, and state or federal fines, administrative fees (Attorney & Trustee’s fees)
• General unsecured debts include obligations like credit card debts and medical debt.

Priority unsecured debts must be paid in full as part of your debt repayment plan.

General unsecured debts are paid from your disposable income-if there is income available. Any unsecured debt that remains at the end of your plan is discharged.

Under Chapter 7, if you have any of these debts, you need to deal with them after your case is finished.

Treatment of Secured Creditors

Under Chapter 7, you can choose to keep or surrender any assets you are financing, such as a car or furniture or elect to continue paying off the debt, often through a reaffirmation agreement.

Under Chapter 13, if you wish to keep an asset you are financing, the loan can be paid through your repayment plan. Chapter 13 can also allow you to reduce how much you need to pay on some secured debts through what is known as a “cram-down,” reducing what you owe to the actual value of the loan collateral.

Treatment of Tax Debts

Tax Debt Relief Under Chapter 7

Eliminating some tax debts under Chapter 7 bankruptcy is possible if you meet all of the following requirements:

• The tax debt is for federal or state income tax
• The tax debt is at least three years old
• You have filed a tax return for at least two years before filing for bankruptcy
• The IRS either has not yet assessed your tax debt or has assessed it 240 or more days before you file for bankruptcy
• You have not engaged in tax evasion or filed a fraudulent return

If you meet these five requirements, your tax debt can be discharged. This discharge will also include any penalties and interest related to the tax debt.

However, the tax debt will not be discharged if you do not meet all these criteria.

Tax Debt Relief Under Chapter 13

A Chapter 13 bankruptcy repayment plan can include tax debts that qualify under the same five criteria outlined above for Chapter 7 bankruptcy.

Any taxes you owe that do not qualify for discharge under the repayment plan are included in the plan and must still be paid in full.

During the repayment plan period, you are protected from IRS collection efforts. 

Under the repayment plan, dischargeable income tax debts are treated like any other unsecured debts: you will pay back a portion of the total amount owed. The remaining balance will be discharged when you complete the repayment plan. 

During the repayment plan, you must continue to file tax returns and pay all new income taxes due under these returns.

Chapter 13 filers must complete tax returns promptly each year. 

The Chapter 13 trustee will likely inspect your future tax filings, and creditors could also request them. If a return shows you are making more money than disclosed, the trustee could demand an increase of your monthly payment.

Treatment of Spousal Support Obligations

Bankruptcy law categorizes separation and divorce financial obligations into two types: support obligations and obligations to settle the division of marital property and debt, which are also known as property settlement obligations.

• You cannot discharge spousal and child support under either Chapter 7 or Chapter 13. This also includes equalization awards.
• Under Chapter 13, you may be able to have property settlement debts from your divorce discharged.

Effect on Your Credit Report

A Chapter 7 bankruptcy remains on your credit report for 10 years.

Chapter 13 stays on your report for seven years.

The calculation period in both cases starts from the month of your bankruptcy filing.

Should You Choose Chapter 7 or Chapter 13 Bankruptcy?

If you qualify to file for either Chapter 7 or Chapter 13 bankruptcy, choosing which procedure to follow depends on your circumstances. 

Here are some basic considerations that can influence your decision about which is best for you.

• Chapter 7 is generally the first choice for simple cases. Chapter 7 can quickly eliminate dischargeable debt if you have relatively few assets and below median income in your state.
• Chapter 13 is the better option if you’re behind on mortgage or car payments and you are seeking to stop a foreclosure or repossession, if your income is greater than the median income, if you need an affordable budget to repay some or all debt, or if there are assets you may lose in a Chapter 7. 

The table below summarizes the major differences between Chapter 7 and Chapter 13 bankruptcy, as they apply to individuals or couples:

Consideration	Chapter 7	Chapter 13
Type of bankruptcy	Liquidation	Reorganization bankruptcy
Who is best suited to use	Individuals or married couples, as well as businesses.Well-suited for simple bankruptcy situations.Best for low-income debtors.Best if you are seeking a fresh start through debt elimination.	Individuals or married couples, including sole proprietorships.Best for more complex bankruptcy situations, especially for people who are behind on secured debt payments like mortgages or auto loans.Best for people seeking to avoid home foreclosure and car repossession.Having a steady income is needed to maintain a debt repayment plan.
Eligibility	Must household income and expense-based pass means test to qualify.	Must not have secured and unsecured debts in excess of statutorily set limits.
Keeping your property	You may have to sell nonexempt property to pay creditors.Many bankruptcy exemptions exist to let you keep property, including household items, your car, and your retirement accounts.	Can keep all your property.
How debts are discharged	Completely discharges many debts upon court approval of the discharge order.Most, if not all, unsecured debts can be eliminated.	Requires at least partial repayment of most debts through the debt repayment plan, including some unsecured debts.
Treatment of secured debts	Will allow for removal of unsecured junior liens on real property (“lien stripping”).Does not allow for reduction of debt principal on secured property.Does not provide a way to catch up on late payments to avoid foreclosure or repossession.	Will allow for removal of unsecured junior liens on real property (“lien stripping”).Will allow for reduction of some secured debt principal loan balance (“cram-down”).Enables you to catch up on missed payments for mortgages or other secured loans.
How long it takes to complete	Most cases take four to six months from filing to discharge.	Debt repayment plans can take from three to five years.
How long it stays on your credit report	10 years	7 years

Talk to a Phoenix Bankruptcy Lawyer About Chapter 7 vs Chapter 13 Bankruptcy

An experienced Arizona bankruptcy attorney from Stone Rose Law can help you carefully weigh all your debt relief options and choose which best suits your circumstances and needs.

Our legal experience with Chapter 7 and Chapter 13 bankruptcy is extensive.

So don’t let wage garnishments, home foreclosures, and harassing collection calls destroy your peace of mind and financial future; call us at (480) 739-2448 today.