Two facts settle most of the choice between Chapter 7 and Chapter 13 bankruptcy. Income above your state’s median for your household size means a stricter test for Chapter 7. Property a Chapter 7 trustee could sell, like home equity, points to Chapter 13, which lets you keep it. Check both before you call a lawyer.
Within a few months, Chapter 7 wipes out most debts with no collateral behind them, but a bankruptcy trustee can sell any property the law doesn’t protect. Chapter 13 lets you keep your property while you repay creditors through a three- to five-year plan.
The first fact is your income. The means test compares your average income over the six months before you file, at a yearly rate, with your state’s median for a household your size. Below it, Chapter 7 is open to you. Above it, a second step subtracts the expenses and loan payments the law allows and projects what’s left over five years. If that sum reaches the law’s threshold, the court can dismiss a Chapter 7 case, which leaves Chapter 13.
The second fact is what you own. Your state’s exemptions, or a federal list where the state allows it, decide what you keep. In most Chapter 7 cases filed by individuals, everything is exempt or tied to a loan, so the trustee sells nothing. Chapter 13 lets you keep equity beyond your exemptions, as long as your plan pays creditors at least what a Chapter 7 sale would have paid them.
Run both checks before your first consultation. Find your state’s figure in the U.S. Trustee Program’s means-testing tables and compare your income with it. Then list what you own, what each item is worth, what you owe on it, and any payment you’re behind on.
A renter with low income and few assets usually files Chapter 7. A homeowner with steady income who’s behind on the mortgage usually files Chapter 13, because its plan can catch up the missed payments over time and save the house. Chapter 13 also leaves your credit report sooner, since Experian keeps a Chapter 7 for 10 years from filing and a Chapter 13 for seven.
Take your numbers and your list to a free consultation with a bankruptcy lawyer, who can run the full means test and confirm the chapter before you file.
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