The two most common personal bankruptcy chapters are Chapter 7 and Chapter 13. Both offer a path to debt relief, but they work differently, qualify under different income standards, and produce different outcomes for secured property like a home or vehicle.
Chapter 7 Bankruptcy: Liquidation and Discharge
Chapter 7 bankruptcy is a liquidation process. The bankruptcy trustee takes nonexempt assets, converts them to cash, and distributes the proceeds to creditors. In exchange, the debtor receives a discharge — a court order permanently eliminating personal liability for most unsecured debts.
Most Chapter 7 cases are “no-asset” cases because state exemption laws protect the assets most people own — a modest home equity, a vehicle up to a value limit, household furnishings, retirement accounts, and necessary tools of trade. If all assets are exempt, the trustee closes the case without distributing anything to creditors, and the debtor receives a discharge.
The Means Test
To file Chapter 7, a debtor must pass the means test. The first step compares the debtor’s average monthly income (calculated over the six months before filing) to the median income for a household of the same size in the same state. Debtors below the state median generally qualify. Those above the median must complete a second calculation deducting allowed expenses to determine whether “disposable income” is low enough to permit Chapter 7. Debtors who cannot pass the means test may file Chapter 13 instead.
Chapter 13 Bankruptcy: Reorganization Through a Repayment Plan
Chapter 13 is a reorganization process. Instead of liquidating assets, the debtor proposes a repayment plan — lasting three to five years — under which they pay disposable income to a trustee who distributes it to creditors. At the end of the plan, remaining eligible unsecured debts are discharged.
Chapter 13 allows debtors to keep nonexempt assets, cure mortgage arrears to save a home from foreclosure, pay off car loans at reduced interest rates through the plan, and handle non-dischargeable priority debts (like certain taxes or domestic support arrears) over time. These features make Chapter 13 the preferred option for debtors with significant assets or who are behind on mortgage payments.
Key Differences at a Glance
| Factor | Chapter 7 | Chapter 13 |
|---|---|---|
| Duration | 3–6 months | 3–5 years |
| Income requirement | Must pass means test | Must have regular income |
| Asset protection | Only exempt assets kept | All assets kept if plan completed |
| Mortgage arrears | Cannot cure through plan | Can cure over plan period |
| Credit report stay | 10 years | 7 years |
| Discharge timing | About 90 days after filing | After completing 3–5 year plan |
Which Chapter Is Right for Your Situation?
Chapter 7 may be the better choice if you pass the means test, have mostly unsecured debt (credit cards, medical bills, personal loans), do not have significant nonexempt assets, and do not need to cure a mortgage default. Chapter 13 may be the better choice if you earn too much for Chapter 7, own property you want to protect beyond the exemption limits, are behind on mortgage payments and want to keep your home, or have non-dischargeable debts that you need to repay in a structured plan.
Frequently Asked Questions
Will bankruptcy eliminate all of my debts?
No. Both chapters discharge most unsecured debts, but certain obligations are non-dischargeable by law: student loans (with narrow hardship exceptions), most taxes, domestic support obligations (alimony and child support), debts incurred through fraud, and criminal fines. Your attorney can identify which of your specific debts would survive bankruptcy.
How long will bankruptcy stay on my credit report?
A Chapter 7 discharge appears on your credit report for 10 years from the filing date. A Chapter 13 discharge appears for 7 years. Individual discharged accounts may also appear separately. However, many people find that credit scores begin recovering meaningfully within two to three years after discharge, particularly once new positive credit history is established.
Can I keep my car in Chapter 7 bankruptcy?
Yes, in most cases. If the car is exempt (or your equity is within the exemption limit) and you are current on the loan, you can reaffirm the debt — signing an agreement to remain personally liable — and keep both the car and the payments. If you are behind on payments, Chapter 13 may give you more options to restructure the loan.