Bankruptcy Chapters 7, 11, and 13: How Each One Works

The Federal Safety Net That Erases Debt—at a Cost

American courts processed 452,990 non-business bankruptcy filings in 2023, a 16.8% increase from 2022. Behind each filing is a person or family who determined that the debt load they carried was mathematically unresolvable through normal means. Bankruptcy is a federal legal process—established under Article I, Section 8 of the Constitution—that either eliminates qualifying debts entirely or restructures them into a manageable repayment plan. The three chapters most consumers and businesses encounter operate on fundamentally different principles.

Chapter 7: Liquidation Bankruptcy

Chapter 7 is the fastest and most complete form of debt relief. A bankruptcy trustee reviews the filer's assets, liquidates non-exempt property to pay creditors as much as possible, and then issues a discharge—a permanent court order eliminating the debtor's personal liability for covered debts. The entire process typically takes three to six months from filing to discharge.

Not all debt survives liquidation eligibility screening. To qualify, debtors must pass the means test: their current monthly income (averaged over the prior six months) must be below the state median income for their household size, or their disposable income after allowed deductions must be insufficient to repay a meaningful portion of unsecured debt. In 2024, state median income thresholds ranged from roughly $58,000 for a single person in Mississippi to $120,000+ for a four-person household in Massachusetts.

Debts dischargeable in Chapter 7 include credit card balances, medical bills, personal loans, utility arrears, and most lease obligations. Debts that cannot be discharged include:

• Child support and alimony
• Most federal and state taxes less than three years old
• Student loans (except in cases of undue hardship under the Brunner test)
• Debts incurred through fraud or willful misconduct
• Criminal fines and restitution
• Recent luxury purchases (over $725 within 90 days of filing) on credit cards

Chapter 13: The Wage Earner's Plan

Chapter 13 restructures debt into a three- to five-year repayment plan administered by a trustee. The debtor keeps all assets and makes monthly plan payments drawn from disposable income. At the end of the plan, remaining eligible unsecured debt is discharged. Chapter 13 does not require a means test for eligibility—instead, it requires that filers have regular income sufficient to fund a repayment plan.

Chapter 13 allows actions Chapter 7 does not:

• Mortgage arrears cure: Past-due mortgage payments can be spread over the plan period, allowing homeowners to stop foreclosure and catch up over three to five years.
• Car loan cramdown: If a vehicle loan is more than 910 days old and the car is worth less than the loan balance, the court can reduce the principal to the vehicle's actual value.
• Co-debtor stay: Creditors cannot pursue co-signers on consumer debts during the plan, a protection Chapter 7 does not offer.
• Broader discharge options: Some debts dischargeable in Chapter 13 are not dischargeable in Chapter 7, including property settlement obligations in divorce cases.

Chapter 11: Reorganization for Businesses (and Some Individuals)

Chapter 11 is the reorganization chapter—primarily used by businesses but available to individuals with debt exceeding Chapter 13's limits (unsecured debt over $2,750,000 or secured debt over $1,395,875 as of April 2022 figures). The debtor typically continues operating as a debtor-in-possession, essentially acting as its own trustee. A reorganization plan must be confirmed by creditors and the court. Creditors can vote to accept or reject the plan by class.

High-profile Chapter 11 cases include Hertz (2020), Sears (2018), J.Crew (2020), and Revlon (2022). Small Business Reorganization Act (SBRA) of 2019 created Subchapter V of Chapter 11 to simplify the process for smaller businesses—those with less than $7.5 million in debt under pandemic-era limits extended through 2024.

Side-by-Side Comparison

Exemptions: What You Keep

Federal bankruptcy law establishes a set of exemptions—assets shielded from liquidation. Most states have enacted their own exemption systems and require filers to use state exemptions instead of federal ones, though a handful allow a choice. Key federal exemptions in 2024 include $27,900 in home equity (homestead), $4,450 in vehicle equity, and $14,875 in household goods.

Texas and Florida have unlimited homestead exemptions—a homeowner can protect a $5 million home from creditors in bankruptcy. This has historically made those states attractive destinations for asset protection planning by wealthy individuals anticipating liability.

The Automatic Stay and Credit Impact

Filing any bankruptcy chapter triggers the automatic stay: an immediate court order prohibiting creditors from calling, suing, garnishing wages, or foreclosing during the bankruptcy proceeding. The stay provides immediate relief from harassment and collection actions. Creditors can petition the court to lift the stay, and courts sometimes grant these requests for secured creditors with collateral losing value.

Bankruptcy is a legal tool with lasting financial consequences, not a financial strategy. Anyone considering filing should consult a bankruptcy attorney to evaluate whether alternatives—debt settlement, debt consolidation, or negotiated payment plans—adequately address their situation first.

This article is for informational purposes only and does not constitute legal advice. Consult a qualified bankruptcy attorney for case-specific guidance.