Bankruptcy
Chapter 7 vs Chapter 13 Bankruptcy: Which Does What
Liquidation or reorganization, the means test, what bankruptcy never erases, and the cost comparison most people skip before enrolling elsewhere.
Consumer bankruptcy comes in two forms. One wipes out debt quickly and can cost you property. The other keeps your property and puts you on a payment plan for years. Choosing between them turns on your income, your assets, and what you are trying to save.
The two chapters
| Chapter 7 | Chapter 13 | |
|---|---|---|
| What it does | Liquidates non-exempt property, discharges most unsecured debt | Reorganizes debt into a 3 to 5 year court-supervised plan |
| Length | About 3 to 4 months | 3 to 5 years |
| Income test | Must pass the means test | Requires regular income |
| Keeps a house in foreclosure? | Delays only | Yes, arrears can be cured through the plan |
| Credit report | 10 years from filing | 7 years from filing |
The federal judiciary publishes a neutral, detailed overview of both in Bankruptcy Basics, including the forms and the process step by step.
The automatic stay
The moment a case is filed, an automatic stay takes effect and stops most collection activity: calls, lawsuits, wage garnishment, bank levies, foreclosure sales, and repossessions. No other debt relief option does this. For someone facing garnishment next week, it is often the deciding factor.
Chapter 7 in practice
You file, a trustee is appointed, you attend a short meeting of creditors, and roughly 60 days later most unsecured debt is discharged. Credit cards, medical bills, personal loans, most old utility bills, and deficiency balances after a repossession all go.
The trustee's job is to find non-exempt property to sell for creditors. In most consumer cases there is none, because exemptions protect a specified amount of home equity, a vehicle, retirement accounts, tools of a trade, and household goods. Exemption amounts vary enormously by state, and some states let you choose the federal set instead. Retirement accounts are broadly protected in bankruptcy, which is why cashing out a 401(k) to pay unsecured debt before filing is usually the wrong move.
To qualify you must pass the means test: your household income is compared with the median for your state and family size, and if it exceeds that, a deeper calculation of allowed expenses determines whether you have meaningful disposable income. The Justice Department publishes the current median income figures and expense standards used in the test at the U.S. Trustee Program's means testing page.
Chapter 13 in practice
You propose a plan to pay a set monthly amount to a trustee for three to five years. The trustee distributes it among creditors by priority. At the end, remaining eligible unsecured balances are discharged, often for cents on the dollar.
Chapter 13 is the right tool when you:
- Are behind on a mortgage and want to keep the house, since arrears can be cured over the plan while you resume regular payments.
- Have non-exempt property you would lose in a Chapter 7.
- Earn too much to pass the means test.
- Owe priority debts such as recent taxes or support arrears that must be paid but can be spread out.
The main risk is completion. Plans running five years demand stable income, and a significant share are dismissed before discharge. A dismissed case leaves you with the debt, the fees, and the filing on your record.
What bankruptcy does not erase
- Domestic support obligations, including child support and most alimony
- Most recent income taxes, and all unfiled-return taxes
- Student loans, absent a showing of undue hardship through a separate adversary proceeding
- Debts from fraud, drunk driving injuries, and most court fines and criminal restitution
- Secured debts, in the sense that you must keep paying to keep the collateral
What it costs
Court filing fees are a few hundred dollars and are published by the courts; fee waivers exist for low-income filers in Chapter 7. Attorney fees vary by district and complexity, commonly $1,000 to $2,500 for a straightforward Chapter 7 and $3,000 to $5,000 for a Chapter 13, with Chapter 13 fees usually paid through the plan rather than up front. Compared with 15 to 25 percent of enrolled balances for a settlement program, bankruptcy is frequently the cheaper resolution for large debt loads.
The comparison people skip
Many people enroll in a four year settlement program specifically to avoid bankruptcy, and end up filing anyway after the program stalls, having paid thousands in fees first. Before enrolling in anything, get a free consultation with a bankruptcy attorney. Most offer them, and the point is not to file, it is to know what the alternative actually costs so you can compare honestly. Our side-by-side comparison of debt relief options is a starting point, but a lawyer looking at your exemptions and your income is worth more than any article.
One more piece of arithmetic in bankruptcy's favour: debt discharged in bankruptcy is never taxable income, while forgiven debt in a settlement often is. See our guide to taxes on forgiven debt.