Chapter 7 vs. Chapter 13 Bankruptcy: Key Differences

Over 400,000 Consumer Bankruptcies Filed in 2023

The Administrative Office of U.S. Courts recorded 418,724 non-business bankruptcy filings in fiscal year 2023 — down dramatically from the 1.5 million annual filings that were typical before the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 tightened eligibility. The two chapters that dominate consumer bankruptcy — Chapter 7 and Chapter 13 — operate on fundamentally different logic. Chapter 7 is fast and clean. Chapter 13 is slower but preserves assets and offers capabilities Chapter 7 cannot provide.

The Means Test: Who Can File Chapter 7

BAPCPA created the means test to screen out higher-income filers who can repay at least a portion of their debts. The test operates in two stages:

Stage 1 — Income Comparison: If the filer's average monthly income over the six months before filing is below the state median income for a household of their size, they automatically qualify for Chapter 7. State median figures are published monthly by the U.S. Trustee Program. A single person in Texas had a median threshold of approximately $5,292/month in 2024.

Stage 2 — Disposable Income: Filers who exceed the state median must calculate disposable income by subtracting allowed expenses (IRS standards for food, clothing, healthcare; actual amounts for housing and transportation) and secured debt payments from their income. If disposable income exceeds $166.67/month (or $10,000 over 60 months), the filer cannot use Chapter 7 — or must rebut a "presumption of abuse."

Chapter 7: Liquidation Basics

Chapter 7 is a liquidation proceeding. A trustee is appointed to collect non-exempt assets, liquidate them, and distribute the proceeds to creditors. In the vast majority of cases — roughly 95% — the filer has no non-exempt assets, making it a "no-asset" case in which unsecured creditors receive nothing and the filer receives a discharge in approximately 90 to 120 days.

The Automatic Stay

Filing either chapter instantly triggers the automatic stay under 11 U.S.C. § 362. Powerful and immediate. The stay prohibits virtually all collection actions against the debtor or property of the bankruptcy estate: lawsuits must halt, wage garnishments stop, phone calls from collectors cease, and foreclosure sales are immediately enjoined. Creditors who willfully violate the automatic stay face actual damages, punitive damages, and attorney fees.

The stay is not unlimited. Repeat filers face shortened or eliminated stays. Criminal proceedings, collection of domestic support obligations, and certain regulatory actions by government agencies are exempt from the stay.

Exemptions: Protecting Core Assets

Bankruptcy exemptions define what filers keep. Federal exemptions exist but most states require filers to use state exemptions — or offer a choice between federal and state. Key exemption categories include:

• Homestead exemption: Ranges from $0 (New Jersey and Pennsylvania have none) to unlimited (Texas and Florida)
• Vehicle exemption: Federal exemption is $4,450; states range from $1,000 (Virginia) to $4,000 (California) to unlimited (Texas for one vehicle)
• Retirement accounts: ERISA-qualified 401(k) and pension plans are fully exempt under federal law (Patterson v. Shumate, 1992); IRAs exempt up to $1,512,350 per person (adjusted periodically)
• Wildcard exemption: Many states allow a wildcard amount to protect any asset

Non-Dischargeable Debts

Both chapters discharge most unsecured debt — credit cards, medical bills, personal loans. But certain debts survive bankruptcy regardless of chapter:

• Student loans (except on showing of "undue hardship" under the Brunner test — rarely granted, though the DOJ eased guidance in 2022)
• Domestic support obligations: alimony and child support
• Recent federal, state, and local taxes (generally, income taxes less than 3 years old)
• Debts incurred by fraud, false pretenses, or false financial statements
• Criminal restitution orders and most fines payable to government
• Debts for willful and malicious injury to persons or property
• DUI-related personal injury or death judgments

Chapter 13 offers one unique discharge advantage: it can discharge certain debts that Chapter 7 cannot, including property settlement obligations from divorce (as distinguished from support) and debts arising from willful injury to property (though not to persons).

This article is for informational purposes only and does not constitute legal advice.