Bankruptcy Basics: Chapter 7 vs. Chapter 13

When Should You Consider Bankruptcy?

Bankruptcy may be appropriate if: you cannot pay your debts, creditors are suing you or garnishing wages, you're facing foreclosure, or you have overwhelming medical or credit card debt.

Chapter 7 Bankruptcy

Chapter 7 is a "liquidation" bankruptcy. A trustee may sell non-exempt assets to pay creditors, and remaining eligible debt is discharged (eliminated). Most Chapter 7 cases are "no-asset" cases—you keep all your property because it's exempt. The process typically takes 3-4 months.

Chapter 13 Bankruptcy

Chapter 13 is a "reorganization" bankruptcy. You propose a repayment plan to pay back some or all debts over 3-5 years. Chapter 13 can help you catch up on mortgage arrears and avoid foreclosure, or keep property that would be lost in Chapter 7.

Eligibility

Chapter 7 eligibility depends on the "means test" (income compared to California median). Chapter 13 requires regular income and debt below certain limits. See the U.S. Bankruptcy Courts for official information.