Chapter 7 vs Chapter 13 in plain English
Chapter 7 (liquidation): non-exempt assets are sold to pay creditors, remaining unsecured debt (most credit cards, medical bills, personal loans) is discharged. Process takes ~90 days. Most filers keep all their property because exemptions cover it.
Chapter 13 (reorganization): you keep all property and follow a court-approved 3–5 year repayment plan. Used by people with regular income who don't qualify for Chapter 7 or who need to catch up on a mortgage.
What gets wiped, what doesn't
- Wiped by Chapter 7: credit-card debt, medical bills, personal loans, most lawsuit judgments, repossession deficiencies.
- Not wiped: federal student loans (in nearly all cases), child support, alimony, recent income tax debt (older tax debt can be discharged), criminal fines, debts from fraud.
- Liens survive: a mortgage on a house remains; you choose to keep paying or surrender the property.
When the math favors filing
Total unsecured debt > 50% of annual income, with no realistic 5-year payoff path.
Garnishments are stripping your paycheck and you can't catch up on essential bills.
Medical bills crushing the household after a major illness, bankruptcy is what the system was designed for.
You've been sued and a judgment is imminent, filing stops the suit immediately (the 'automatic stay').
The credit consequences (and the recovery curve)
Chapter 7 stays on your credit report for 10 years. Chapter 13 stays for 7 years. Score drop at filing: typically 100–200 points for those with previously average credit; less for those whose score is already low.
Most filers can qualify for a secured credit card within 6 months, an FHA mortgage at 24 months, and a conventional mortgage at 48 months. Recovery is faster than most people assume.
Costs and process
- Filing fees: $338 (Chapter 7) or $313 (Chapter 13). Waivers available for low-income filers.
- Attorney fees: $1,000–$3,500 for most Chapter 7 filings, $3,000–$5,000 for Chapter 13.
- Required: pre-filing credit counseling (~$50) and post-filing debtor education (~$50).
- Means test: Chapter 7 requires income below the state median (or detailed disposable-income analysis). Above the threshold, you're directed to Chapter 13.
Alternatives to try first
- Negotiate directly with creditors, many will accept 30–60 cents on the dollar for charged-off debt.
- Debt management plan via a non-profit credit counseling agency (NFCC member).
- Income-driven repayment for student loans (federal only).
- Sale of non-essential assets to pay down debt without filing.
After filing: rebuilding deliberately
- Open a secured credit card 6 months after discharge, small limit, paid in full each month.
- Add a credit-builder loan from a credit union.
- Re-establish a basic budget; rebuild a $1,000 starter emergency fund within 12 months.
- Avoid the predatory 'rebuild your credit fast' offers that target post-bankruptcy filers.
