How to Declare Bankruptcy in the US: Chapter 7 vs Chapter 13

Bankruptcy is a legal process that provides relief from overwhelming debt. It's not a sign of failure " — it's a financial tool designed to give honest debtors a fresh start. Before filing, you need to understand which type of bankruptcy applies to your situation, what you'll lose, and what alternatives exist.

Chapter 7 Bankruptcy: Liquidation

Chapter 7 is the most common form of personal bankruptcy. It eliminates most unsecured debts (credit cards, medical bills, personal loans) by liquidating non-exempt assets. In practice, most Chapter 7 filers keep all of their property because state and federal exemptions protect the majority of assets.

Chapter 7 Requirements

• Means test: Your income must be below the median income for your state and household size. If you earn above the median, you may not qualify for Chapter 7.
• No recent bankruptcy: You can't file Chapter 7 if you received a Chapter 7 discharge within the past 8 years or a Chapter 13 discharge within the past 6 years.
• Credit counseling: You must complete a credit counseling course from an approved agency within 180 days before filing.

What Chapter 7 Eliminates

• Credit card debt
• Medical bills
• Personal loans
• Utility bills
• Certain court judgments

What Chapter 7 Does NOT Eliminate

• Student loans (except in rare hardship cases)
• Child support and alimony
• Tax debts (less than 3 years old)
• Debts not listed in your bankruptcy filing
• Debts incurred through fraud

Chapter 13 Bankruptcy: Repayment Plan

Chapter 13 is a reorganization bankruptcy. Instead of eliminating debts, you create a 3-5 year repayment plan based on your disposable income. At the end of the plan, remaining qualifying debts are discharged. Chapter 13 is often called the "wage earner's plan" because it's designed for people with regular income who can afford to pay some of their debts.

Chapter 13 Requirements

• Regular income: You must have a steady source of income to fund the repayment plan.
• Debt limits: As of 2026, your secured debts must be less than $2,750,000 and unsecured debts less than $465,000 (these limits are periodically adjusted).
• No recent bankruptcy: You can't file Chapter 13 if you received a Chapter 7 discharge within the past 4 years or a Chapter 13 discharge within the past 2 years.

Chapter 7 vs Chapter 13: Side-by-Side Comparison

The Bankruptcy Process: Step by Step

1. Consult a bankruptcy attorney. Most offer free initial consultations. An attorney evaluates your finances and recommends the best option. You can file without an attorney (pro se), but it's strongly discouraged.
2. Complete credit counseling. Required before filing. Available online for $15-$50 through approved agencies.
3. File your petition. Your attorney files the bankruptcy petition with your local federal bankruptcy court. An automatic stay goes into effect immediately, stopping all collection calls, lawsuits, and wage garnishments.
4. Attend the 341 meeting. About 30-40 days after filing, you meet with a bankruptcy trustee who asks questions about your finances under oath.
5. Complete debtor education. Required before your debts are discharged. Available online for $15-$50.
6. Receive discharge. Chapter 7: approximately 3-4 months after filing. Chapter 13: after completing the 3-5 year repayment plan.

Alternatives to Bankruptcy

Before filing for bankruptcy, consider these alternatives:

• Debt management plan (DMP): A nonprofit credit counseling agency negotiates lower interest rates and monthly payments with your creditors. You make one monthly payment to the agency, which distributes it to your creditors. Typically takes 3-5 years.
• Debt settlement: You (or a company you hire) negotiate with creditors to accept less than the full amount owed (typically 40-60 cents on the dollar). This damages your credit but less than bankruptcy.
• Negotiating directly with creditors. Many creditors will work with you on reduced payments, lower interest rates, or hardship programs if you simply ask.