When people compare Chapter 7 and Chapter 13 bankruptcy, they are choosing between two federal debt-relief tools that work in opposite ways: Chapter 7 sells your non-exempt property and erases most unsecured debt in a matter of months, while Chapter 13 lets you keep your property and repay creditors through a court-approved plan that lasts three to five years. Both are filed under the U.S. Bankruptcy Code, both trigger an automatic stay that immediately halts most collection activity, and both end in a discharge that legally cancels qualifying debt.
This post explains how eligibility works, including the means test, which debts a discharge does and does not cover, how exemptions shield your assets, and what happens to your property under each chapter. It closes with practical steps for deciding which path fits.
What is the difference between Chapter 7 and Chapter 13 bankruptcy?
The core difference is that Chapter 7 uses your existing assets to pay creditors, while Chapter 13 uses your future income to repay them over time. Both are common consumer bankruptcy options, but they suit different financial situations.
- Chapter 7 (liquidation). A court-appointed trustee reviews your property, sells anything that is not protected by an exemption, and distributes the proceeds to creditors. In practice, most consumer Chapter 7 cases are "no-asset" cases, meaning everything the filer owns is exempt and nothing is sold. The discharge typically arrives within a few months of filing. This chapter tends to fit filers with limited income and mostly unsecured debt.
- Chapter 13 (repayment plan). Instead of liquidation, you propose a plan to repay some or all of your debts out of monthly income. You make payments to a trustee, who distributes the money to creditors. The plan runs three years for lower-income filers and up to five years for higher-income filers. When the plan is completed, remaining qualifying balances are discharged. This chapter tends to fit filers with regular income who want to keep property or catch up on a mortgage or car loan.
Who qualifies for Chapter 7, and what is the means test?
Chapter 7 is available to filers whose income is low enough to pass the means test, a calculation that compares your income to the median income for a household of your size in your state. Congress added this test to discourage higher-income filers from using Chapter 7 when they could afford to repay part of what they owe.
The test generally works in two stages. First, your average monthly income over the six months before filing is annualized and compared to the state median, using figures published by the U.S. Trustee Program that are updated periodically. If your income is below the median, you usually qualify for Chapter 7. If it is above the median, a second stage subtracts allowed living expenses to determine your disposable income. If that disposable income is high enough to fund a meaningful repayment plan, a Chapter 7 filing may be presumed abusive, and you may need to file under Chapter 13 instead.
Chapter 13 has its own eligibility rules. It is available only to individuals with regular income, and your secured and unsecured debts must fall under the limits set by the Bankruptcy Code, which are adjusted from time to time. There is no means test for Chapter 13, but your plan must commit your disposable income to creditors. Both chapters also require you to complete an approved credit counseling course within the 180 days before filing, and a debtor education course before discharge.
What debts are discharged in bankruptcy?
Both chapters discharge most unsecured debts, such as credit card balances, medical bills, and personal loans, but neither one erases every kind of debt. A discharge cancels your personal legal obligation to pay the covered debts, which is why it is the goal of most filings.
Several categories are commonly non-dischargeable in either chapter:
- Most recent income taxes and certain other tax obligations.
- Domestic support obligations, including child support and alimony.
- Most student loans, unless the filer proves that repayment would cause undue hardship.
- Debts from fraud, embezzlement, or intentional wrongdoing.
- Court fines, penalties, and criminal restitution.
- Personal injury debts arising from operating a vehicle while intoxicated.
Secured debts work differently. A discharge can remove your personal liability on a mortgage or car loan, but the lender's lien on the collateral survives, so keeping the house or car means you generally must keep paying. Chapter 13 offers tools that Chapter 7 does not, such as curing past-due mortgage payments over the life of the plan and, in some cases, reducing certain secured balances. Its discharge has historically reached a slightly broader set of debts, though a 2005 law narrowed that advantage.
What property can you keep through exemptions?
Exemptions are legal categories of property that you are allowed to keep, and they determine what a trustee can and cannot reach. Understanding them is central to predicting what actually happens to your belongings.
There are two exemption systems: a federal set built into the Bankruptcy Code and a separate set under each state's law. Some states let filers choose between the federal exemptions and the state exemptions, while others require you to use the state set. Common exemption categories include:
- A homestead exemption for equity in your primary residence.
- A motor vehicle exemption for equity in a car.
- Household goods, clothing, and personal property up to set limits.
- Tools of the trade used in your work.
- A wildcard exemption that can be applied to property of your choice.
- Retirement accounts, which are broadly protected in most cases.
The dollar amounts vary widely. Homestead protection in particular ranges from modest caps in some states to nearly unlimited in a few. Federal exemption amounts are adjusted for inflation on a set schedule. In a Chapter 7 case, exemptions decide which assets are safe from liquidation. In a Chapter 13 case, they help set the floor for how much unsecured creditors must receive under the plan.
How does each chapter affect your assets?
In Chapter 7 the trustee can sell any non-exempt property, while in Chapter 13 you keep everything and instead pay creditors at least the value of what they would have received in a liquidation. This "best interest of creditors" comparison is why exemptions matter in both chapters, not just in Chapter 7.
Under Chapter 7, many consumer filers lose nothing because all of their property is exempt. If you do hold significant non-exempt equity, such as a second vehicle or valuable collectibles, the trustee may sell it and distribute the proceeds. Filers who want to keep collateral tied to a secured loan may reaffirm that debt and continue the payments.
Under Chapter 13, you keep your assets and repay creditors over the plan period. Because the plan must pay unsecured creditors at least what they would have received in a Chapter 7 liquidation, filers with substantial non-exempt property often use Chapter 13 to protect it. Chapter 13 also lets you stop a foreclosure or repossession and catch up on missed payments over time, which Chapter 7 does not provide. As for credit history, a bankruptcy can appear on your credit report for up to ten years, and a completed Chapter 13 is often removed sooner than a Chapter 7 as a matter of credit bureau practice.
What to do next
Deciding between the two chapters starts with an honest look at your numbers and your goals. The following steps can help you prepare.
- Gather your numbers. List your income, monthly expenses, total debts by type, and everything you own with its approximate value.
- Check your state's rules. Look up the median income figure for your household size and the exemptions available where you live, since both drive the outcome.
- Complete required credit counseling. You must finish an approved course before filing, so starting early avoids delay.
- Weigh your priorities. If your goal is a fast, clean break from unsecured debt, Chapter 7 may fit. If your goal is to keep a home or car and cure arrears, Chapter 13 may fit.
- Consider alternatives. Depending on your situation, debt negotiation, a repayment plan outside of court, or doing nothing may serve you better than filing.
- Talk to a professional. A licensed bankruptcy attorney or a nonprofit legal aid office can confirm eligibility and flag consequences specific to your case.
One closing caution: bankruptcy law is federal, but exemption amounts, median income tables, and debt limits vary by state and change over time. This post is general information, not legal advice. Confirm the current rules and your best option with a licensed bankruptcy attorney in your state before you file.