Should I File Chapter 7 or 13 Bankruptcy? The No-BS Guide to Your Fresh Start

Think of Chapter 7 as the express lane and Chapter 13 as the scenic route. Both get you to debt freedom, but they take wildly different paths.

Chapter 7 bankruptcy is what most people picture when they hear “bankruptcy.” It’s fast, it’s final, and it wipes your slate clean. In about four to six months, the bankruptcy court liquidates (sells) your non-essential assets to pay creditors, then erases what’s left of your unsecured debt—think credit cards, medical bills, personal loans.

Chapter 13 bankruptcy is more like a court-supervised debt diet. Instead of wiping everything away, you commit to a three-to-five-year repayment plan based on what you can actually afford. You keep your stuff, catch up on missed payments, and at the end, any remaining qualifying debt gets discharged.

Who Should File Chapter 7?

Chapter 7 makes sense if you’re earning less than your state’s median income and you’re buried under credit card debt or medical bills with no realistic way to pay them off. It’s particularly powerful for wiping out unsecured debt completely.

Here’s when Chapter 7 shines:

• You have little to no assets worth protecting. If you’re renting, drive an older car, and don’t own much of value, there’s nothing for the trustee to take.
• Your income qualifies. You pass the means test, which compares your income to your state’s median. In most states, that’s around $50,000–$60,000 for a single person.
• You want fast relief. Four to six months from filing to discharge beats a five-year payment plan any day.
• Your debt is mostly unsecured. Credit cards, personal loans, and medical debt all vanish in Chapter 7.

But watch out—Chapter 7 doesn’t discriminate. If you own a home with substantial equity or a valuable vehicle that exceeds your state’s exemption limits, the trustee can sell them to pay your creditors. That’s a harsh reality worth understanding before you file.

Who Should File Chapter 13?

If you’re earning too much to qualify for Chapter 7, or you have assets you absolutely can’t lose—like your home or car—Chapter 13 might be your better bet.

Chapter 13 works best when:

• You’re behind on your mortgage. This is huge. Chapter 13 lets you catch up on missed payments over three to five years while keeping foreclosure at bay. It’s one of the few legal tools that can save your home.
• You have significant equity in assets. Own a car worth $25,000 with only $5,000 owed? Chapter 13 protects it. Chapter 7 might force you to sell.
• You earn above your state’s median income. If you failed the means test for Chapter 7, Chapter 13 becomes your default option.
• You have secured debt to reorganize. Car loans, second mortgages, and other secured debts can sometimes be restructured under better terms.

The trade-off? You’ll be on a tight budget for years, making monthly payments to the trustee who distributes the money to your creditors. Miss payments, and your case gets dismissed—leaving you right back where you started, except now with less time and more legal fees spent.

The Means Test: Your Bankruptcy Gatekeeper

Before you can file Chapter 7, you must pass the means test—essentially, the court wants proof you can’t afford to pay your debts. They calculate your average monthly income over the past six months and compare it to your state’s median income for your household size.

If you earn less than the median, congratulations—you pass automatically. If you earn more, the court digs deeper into your expenses and disposable income. They’ll look at housing costs, transportation, food, healthcare, and other necessary expenses. If there’s enough left over to fund a Chapter 13 plan, you’ll be pushed into that instead.

Here’s the kicker: the means test isn’t just about your current paycheck. It looks backward six months. So if you recently lost a high-paying job or took a pay cut, those old paychecks might disqualify you from Chapter 7 even though you’re broke now. Timing matters.

Pro Tip:

If you’re close to the income threshold, waiting a month or two before filing can sometimes make the difference between qualifying for Chapter 7 or being stuck with Chapter 13.

What Happens to Your House and Car?

This is where most people panic, and rightfully so. Nobody wants to lose their home or car because of bankruptcy. Let’s break down what actually happens.

Your Home in Chapter 7

If you’re current on your mortgage and your home equity falls within your state’s homestead exemption, you keep your house. Simple as that. Most states protect anywhere from $25,000 to $600,000 in home equity—some states like Florida and Texas have unlimited homestead exemptions.

But if you’re behind on payments, Chapter 7 only gives you temporary breathing room. The automatic stay stops foreclosure proceedings when you file, but once your bankruptcy case closes (usually in four to six months), the lender can resume foreclosure.

Your Home in Chapter 13

This is where Chapter 13 becomes a lifesaver. You can cure your mortgage default by spreading the missed payments over your repayment plan. As long as you make your plan payments and stay current on new mortgage payments, foreclosure is permanently stopped. This is one of the biggest reasons homeowners choose Chapter 13.

Your Car in Both Chapters

Most states have motor vehicle exemptions ranging from $3,000 to $15,000. If your car’s equity (market value minus what you owe) fits within that exemption, you’re golden in Chapter 7. If not, the trustee might sell it—though this rarely happens because selling used cars is a hassle and often nets the court less than expected.

In Chapter 13, you keep your car regardless of equity as long as you make payments. You might even be able to cram down your car loan if you bought it more than 910 days ago, reducing the loan balance to the car’s current value.

Does Bankruptcy Stop Debt Collectors and Wage Garnishment?

Yes—immediately. The moment you file either Chapter 7 or 13 bankruptcy, an automatic stay goes into effect. This is a court order that stops virtually all collection activity cold.

The automatic stay stops:

• Collection calls and letters
• Wage garnishment
• Bank account levies
• Lawsuits and judgments
• Foreclosure proceedings
• Repossession attempts
• Utility shutoffs

If a creditor violates the automatic stay after being notified of your bankruptcy, they can face serious penalties. This legal shield gives you immediate relief and breathing room to rebuild. For anyone dealing with relentless debt collection, this alone can be life-changing.

Important caveat: the automatic stay is temporary in Chapter 7 and only lasts through your case (about four to six months). In Chapter 13, it remains in effect for the duration of your repayment plan as long as you stay current on payments.

Which Debts Can You Actually Wipe Out?

Not all debts are created equal in bankruptcy court. Some vanish completely, while others stick around no matter what.

Debts Bankruptcy Eliminates (Dischargeable)

• Credit card debt – Gone completely
• Medical bills – Wiped out entirely
• Personal loans – Discharged
• Utility bills – Erased
• Collection accounts – Eliminated
• Old income taxes – Sometimes dischargeable if they meet specific criteria (usually 3+ years old)

Debts That Survive Bankruptcy (Non-dischargeable)

• Student loans – Almost never discharged unless you prove “undue hardship” (extremely difficult)
• Child support and alimony – Always survive bankruptcy
• Recent income taxes – Taxes less than three years old typically remain
• Court fines and restitution – Criminal penalties aren’t dischargeable
• Debts from fraud or malicious injury – If you lied to get the loan, it sticks
• DUI-related debts – Personal injury debts from drunk driving remain

Understanding this distinction is critical when deciding whether bankruptcy makes sense. If most of your debt falls into the non-dischargeable category—say, $80,000 in student loans and $5,000 in credit cards—bankruptcy might not be worth the hit to your credit score.

The Credit Score Reality Check

Let’s address the elephant in the room: yes, bankruptcy tanks your credit score. Chapter 7 stays on your credit report for 10 years; Chapter 13 for seven years. Your score will drop—sometimes by 200+ points initially.

But here’s what the fear-mongers won’t tell you: if your credit is already trashed from late payments, collections, and maxed-out cards, bankruptcy might actually improve your score faster than you think.

Why? Because after bankruptcy, you have zero debt. Your debt-to-income ratio improves dramatically. You can start rebuilding immediately with secured credit cards and on-time payments. Many people see their scores climb back to the 600s within 12 to 18 months.

Compare that to the alternative: spending years making minimum payments on debt you’ll never escape, watching your score slowly decay anyway. Sometimes the fastest path to financial recovery runs straight through bankruptcy court.

Reality Check:

Credit card companies love to keep you trapped in minimum payments forever. They’re not worried about your credit score—they’re worried about losing a profitable customer. Don’t let fear of credit damage keep you stuck in an impossible situation.

How Much Does Bankruptcy Actually Cost?

Bankruptcy isn’t free, but it’s cheaper than drowning in debt for decades.

Chapter 7 Costs

• Court filing fee: $338 (as of 2025)
• Attorney fees: $1,000–$2,500 (varies by location and complexity)
• Credit counseling courses: $20–$50 (required before and after filing)
• Total estimated cost: $1,400–$2,900

Chapter 13 Costs

• Court filing fee: $313 (as of 2025)
• Attorney fees: $3,000–$5,500 (often paid through your plan)
• Credit counseling courses: $20–$50
• Trustee fees: Built into plan payments (usually 3–10% of distributions)
• Total estimated cost: $3,400–$5,900

Before you balk at these numbers, do the math. If you’re carrying $30,000 in credit card debt at 22% interest, you’ll pay roughly $15,000 in interest alone over five years while making minimum payments—and you’ll still owe $15,000 in principal. Bankruptcy starts looking like a bargain.

Many attorneys offer payment plans or let you include their fees in your Chapter 13 repayment plan. If you absolutely can’t afford the fees, some areas have legal aid organizations that provide free bankruptcy assistance to low-income individuals.

Should You Talk to a Bankruptcy Attorney?

Short answer: yes. Absolutely yes.

Bankruptcy law is complex and state-specific. One wrong move—forgetting to list a creditor, transferring property before filing, lying on your paperwork—can get your case dismissed or even result in fraud charges.

A good bankruptcy attorney will:

• Evaluate whether you actually need bankruptcy or if alternatives like debt settlement or debt consolidation make more sense
• Help you pass the means test if you’re on the edge
• Maximize your exemptions to protect your assets
• Navigate trustee meetings and court proceedings
• Ensure you get the maximum discharge possible
• Handle creditor objections and complications

Most bankruptcy attorneys offer free consultations. Take advantage of this. Interview two or three attorneys before choosing one. Ask about their experience with cases like yours, their success rate, and what to expect throughout the process.

According to the U.S. Courts, people who file bankruptcy with an attorney are significantly more likely to receive a discharge than those who file pro se (without representation). The system is designed to be navigated by professionals—use one.

When Bankruptcy Might Not Be Your Best Move

Bankruptcy is powerful, but it’s not always the answer. Sometimes it makes your situation worse, not better.

Skip bankruptcy if:

• Your debts are mostly student loans. Since student loans rarely get discharged, bankruptcy won’t help much. Focus on income-driven repayment plans instead.
• You’re judgment-proof. If you have no income, no assets, and no wages to garnish, creditors can’t collect anyway. Bankruptcy might be unnecessary.
• You’re about to receive a large sum. Expecting an inheritance, settlement, or bonus within six months? The bankruptcy trustee might seize it. Wait until after you receive and spend it responsibly.
• You recently transferred assets. The court looks back at your financial transactions for up to two years (sometimes longer for fraudulent transfers). Trying to hide money or property before filing is bankruptcy fraud—don’t do it.
• You can afford a realistic repayment plan. If you can pay off your debt in 2–3 years without bankruptcy, that might preserve your credit better.

Bankruptcy should be a strategic decision, not an emotional one. Run the numbers. Consider alternatives. Then decide.

Chapter 7 vs Chapter 13: Which Should You Choose?

So we’re back to the original question: should you file Chapter 7 or 13 bankruptcy?

Here’s your decision tree:

Choose Chapter 7 if:

• ✓ Your income is below your state’s median
• ✓ You have little or no valuable property to protect
• ✓ Your debt is mostly unsecured (credit cards, medical bills, personal loans)
• ✓ You want fast relief (4–6 months)
• ✓ You’re current on your mortgage (or you don’t own a home)

Choose Chapter 13 if:

• ✓ You’re behind on your mortgage and want to save your home
• ✓ You have significant equity in your home or car that exceeds exemption limits
• ✓ Your income is too high to qualify for Chapter 7
• ✓ You have tax debt or other priority debts to manage
• ✓ You can afford monthly payments for 3–5 years

For most people struggling with overwhelming credit card and medical debt, Chapter 7 offers the quickest path to a fresh start. But if you’re fighting to keep your home or have assets worth protecting, Chapter 13’s slower approach might save everything you’ve worked for.

The Bottom Line: Your Fresh Start Awaits

Bankruptcy isn’t failure—it’s a legal tool designed to give honest people a second chance when debt becomes insurmountable. Whether you should file Chapter 7 or 13 bankruptcy depends on your income, assets, and what you’re trying to protect.

Chapter 7 works best for quick debt elimination when you have limited assets. Chapter 13 shines when you need to protect your home or have income that disqualifies you from Chapter 7. Both stop collection harassment, both halt wage garnishment, and both offer a path out of crushing debt.

The most important step? Stop suffering in silence. Schedule a free consultation with a bankruptcy attorney in your area. Bring your income statements, debt lists, and asset information. Be honest about your situation. Let them analyze your options and recommend the best path forward.

Debt doesn’t have to define your life. Bankruptcy gave millions of Americans a fresh start—it might do the same for you. The question isn’t whether you should be embarrassed about considering bankruptcy. The question is: what are you waiting for?

Ready to Take Action?

Find a bankruptcy attorney near you, gather your financial documents, and schedule that free consultation. Your future self will thank you for having the courage to face this head-on.

For more expert financial guidance and debt management strategies, visit Wealthopedia