Two paths, same goal: a fresh start
Personal bankruptcy comes in two main forms. Which one you qualify for depends primarily on your income.
Chapter 7: Liquidation
- What it does: Eliminates most unsecured debt completely. Done in about 4 months.
- Who qualifies: You must pass the "means test" — generally, your income must be below your state's median for your household size.
- What you keep: Most people keep everything. State exemptions protect your primary home (up to a limit), vehicle (up to a limit), retirement accounts (fully protected), household goods, and tools of your trade.
- What you lose: Non-exempt assets may be sold by the trustee. In practice, about 95% of Chapter 7 cases are "no-asset" cases — meaning nothing is taken.
- Cost: Court filing fee of $338 + attorney fees of $1,000-2,500 depending on complexity and location.
- Credit impact: Stays on your credit report for 10 years. But the rebuilding clock starts immediately.
Chapter 13: Reorganization
- What it does: Creates a 3-5 year court-approved repayment plan. At the end, remaining qualifying debt is discharged.
- Who qualifies: People whose income is too high for Chapter 7, or who want to keep assets that would be at risk in Chapter 7 (like a home with significant equity).
- What you keep: Everything — as long as you make the plan payments.
- Key advantage: Can stop foreclosure and let you catch up on mortgage arrears over the plan period. This is the main reason people choose Chapter 13.
- Cost: Court filing fee of $313 + attorney fees of $2,500-5,000 (often paid through the plan).
- Credit impact: Stays on your credit report for 7 years from filing date.
What bankruptcy CANNOT eliminate
- Most student loans (with rare exceptions)
- Child support and alimony
- Most tax debts less than 3 years old
- Debts from fraud or intentional harm
- Criminal fines and restitution
- HOA fees that come due after filing
The means test (simplified)
The means test compares your household income to your state's median income for your household size. If you're below the median, you qualify for Chapter 7. If you're above, you may still qualify after deducting certain expenses. Your bankruptcy attorney will run this calculation — it takes about 15 minutes with your financial information.
Which one is right for you?
This is genuinely a question for a bankruptcy attorney, not the internet. But general guidance:
- Chapter 7 if: Income is below median, you don't have significant assets to protect, and you want the fastest fresh start.
- Chapter 13 if: Income is above median, you're behind on your mortgage and want to save your home, or you have non-exempt assets you want to keep.
Either way, start with a free consultation. Find an attorney through your state bar's referral service or LawHelp.org.