Filing Bankruptcy: Chapters 7 and 13 Explained

Filing Bankruptcy

Chapter 7: Liquidation

Chapter 7 eliminates most unsecured debts (credit cards, medical bills, personal loans) in exchange for surrendering non-exempt assets.

Eligibility: Must pass the means test — your income must be below your state's median income, or your disposable income must be too low to fund a Chapter 13 plan.

What Happens:

File petition, schedules, and financial statements with the bankruptcy court

Automatic stay immediately stops collections, lawsuits, garnishments, and foreclosure

A trustee is appointed to review your assets

Attend a 341 Meeting of Creditors (brief, typically 5-10 minutes)

Non-exempt assets are sold to pay creditors (most Chapter 7 cases are "no-asset")

Remaining eligible debts are discharged (eliminated) — typically within 3-4 months

Debts NOT Discharged: Student loans (usually), recent taxes, child support, alimony, fraud-based debts, DUI-related debts

Chapter 13: Reorganization

Chapter 13 allows you to keep your assets and repay some or all debts through a 3-5 year payment plan.

Eligibility: Regular income. Secured debts under $2,750,000 and unsecured debts under $2,750,000 (2024 limits, adjusted periodically).

Best for:

Homeowners behind on mortgage payments who want to keep their home

People with income too high for Chapter 7

People who want to protect non-exempt assets

People with non-dischargeable tax debts they need time to pay

Exemptions: What You Can Keep

Bankruptcy exemptions protect certain property from being taken by the trustee:

Homestead Exemption: Protects equity in your primary residence (varies widely by state: $0 in some states to unlimited in Texas and Florida)

Vehicle Exemption: Typically $2,000-$7,500 in equity

Personal Property: Clothing, household goods, tools of the trade

Retirement Accounts: 401(k)s and IRAs are generally fully protected

Wildcard Exemption: Can be applied to any property

The Impact on Your Credit

Chapter 7 stays on your credit report for 10 years

Chapter 13 stays for 7 years

You can begin rebuilding credit immediately after discharge with secured credit cards and responsible use

Disclaimer: Bankruptcy is a powerful tool but has long-term consequences. Consult a bankruptcy attorney for a free evaluation of your options.