Bankruptcy in 2026: Chapter 7 vs Chapter 13, the Means Test, and What You Can and Cannot Discharge

Bankruptcy exists because the legal system recognizes that people sometimes accumulate more debt than they can repay, and that permanent indebtedness serves no one well — not the debtor, not the economy, and ultimately not most creditors either. Understanding what bankruptcy actually does, what it costs, and what the realistic consequences are is essential before making the decision to file.

Chapter 7: Liquidation Bankruptcy

Chapter 7 is the most common form of personal bankruptcy. A court-appointed trustee reviews your assets and may sell non-exempt property to pay creditors. In exchange, most of your unsecured debts are discharged — eliminated — typically within 3 to 6 months of filing. The process is relatively fast and the fresh start is relatively clean.

Chapter 7 is best for people with significant unsecured debt (credit cards, medical bills, personal loans) who have limited income and relatively few non-exempt assets. The typical Chapter 7 filer is a no-asset case — the trustee looks at the assets, determines everything is covered by exemptions, and there is nothing to sell. Creditors get nothing, the debts are discharged, and the case closes.

The Means Test: Who Qualifies for Chapter 7

Congress added the means test in 2005 to prevent high-income filers from choosing Chapter 7 when they could repay creditors. The test has two parts. The first part compares your average monthly income over the past 6 months to the median income for a household of your size in your state. If you are below the median, you automatically pass and qualify for Chapter 7.

If your income exceeds the state median, you move to the second part of the means test. This is a detailed deduction analysis that subtracts allowable monthly expenses — including IRS national standards for food, clothing, and personal care, local standards for housing and transportation, and actual expenses for certain categories like childcare and health insurance. If your monthly disposable income after these deductions is below certain thresholds ($167 per month or $10,000 over 5 years), you still pass.

The means test is a threshold, not a complete picture of eligibility. Even if you pass the means test, the court can dismiss a Chapter 7 case if it finds abuse based on the totality of circumstances. A bankruptcy attorney can evaluate whether your specific situation is likely to pass scrutiny.

Chapter 13: Reorganization Bankruptcy

Chapter 13 allows you to keep your assets and repay a portion of your debts over a 3 to 5 year court-approved plan. There is no income ceiling for Chapter 13 (though there are debt limits). It is available to anyone with regular income who can fund a repayment plan.

Chapter 13 is better than Chapter 7 in several important situations. If you have significant home equity that exceeds your state's homestead exemption, Chapter 13 lets you keep the home while paying out the excess over the plan term rather than losing it in a Chapter 7 liquidation. If you are behind on mortgage payments and want to save your home from foreclosure, Chapter 13 allows you to cure the arrears over 3 to 5 years while staying current on future payments.

Chapter 13 also discharges some debts that Chapter 7 cannot, including most HOA fees that accrued before filing and certain tax debts. However, it requires 3 to 5 years of court-supervised repayment, which is demanding. If your income drops during the plan period, you may need to modify the plan or convert to Chapter 7.

What Debts Can Be Discharged

Most unsecured consumer debts are dischargeable in bankruptcy. This includes credit card balances, medical bills, personal loans, payday loans, utility arrears, lease obligations, and most other general consumer debt. For many people struggling with debt, the vast majority of what they owe qualifies for discharge.

Several categories of debt are not dischargeable in bankruptcy. Student loans are the most significant — they survive bankruptcy except in cases of undue hardship, which courts define very narrowly. Alimony and child support obligations are never dischargeable. Recent income taxes (within 3 years of the due date) are not dischargeable. Debts arising from fraud, false representations, or willful harm are not dischargeable. Fines, restitution, and criminal penalties are not dischargeable. DUI-related injury debts are not dischargeable.

What Assets Are Protected by Exemptions

Bankruptcy exemptions protect certain assets from creditors and from the Chapter 7 trustee. Federal exemptions are available in some states, while other states require you to use state exemptions. The differences can be enormous.

The homestead exemption protects equity in your primary residence. This ranges from unlimited protection in Florida and Texas to zero in states like New Jersey and Pennsylvania, where the federal exemption of roughly $29,275 would apply. Retirement accounts including 401(k)s, 403(b)s, and IRAs are generally very well protected — often completely exempt. This is intentional policy to prevent bankruptcy from wiping out retirement security.

Vehicle exemptions protect equity in your car, typically between $2,500 and $5,000 under most state schemes, though some states are more generous. Tools of the trade, household goods up to a total dollar value, and wild card exemptions (which can be applied to any asset) round out typical exemption packages. A bankruptcy attorney can tell you exactly what is protected under your state's law.

The Automatic Stay: Immediate Relief When You File

One of the most powerful effects of filing bankruptcy is the automatic stay, which takes effect the moment your petition is filed. The stay immediately stops virtually all collection activity: wage garnishments stop, bank account levies cease, foreclosure proceedings are paused, pending lawsuits are stayed, and debt collectors must stop calling.

The automatic stay is immediate and does not require a court order — filing the petition is enough. This makes it a powerful emergency tool when a garnishment has taken over your paycheck or when foreclosure is imminent. However, creditors can petition the court to lift the stay in certain situations, particularly for secured creditors like mortgage lenders when there is no equity in the property or when you are not maintaining payments.

The Real Cost of Bankruptcy

Court filing fees are $338 for Chapter 7 and $313 for Chapter 13. Attorney fees typically run $1,000 to $2,000 for a simple Chapter 7 and $3,000 to $5,000 for Chapter 13 depending on location and complexity. There is a mandatory credit counseling requirement before filing (typically $25–$50) and a debtor education course before discharge ($25–$50).

The credit impact is significant but often overstated in terms of duration. Chapter 7 stays on your credit report for 10 years and Chapter 13 for 7 years. However, because most people filing bankruptcy already have severely damaged credit from missed payments, collections, and charge-offs, the actual score impact of the filing itself is often smaller than expected. Many filers see their scores begin recovering within 12 to 24 months as the debt is gone and they can rebuild with secured credit cards and on-time payments.

When Bankruptcy Is and Is Not the Right Answer

Bankruptcy is appropriate when your unsecured debt load is genuinely unmanageable relative to your income and realistic ability to repay, when creditor actions like garnishments or lawsuits are threatening your ability to survive financially, when most of your debt is dischargeable (not primarily student loans or tax debts that will survive), and when you have already tried negotiation and other options without success.

Bankruptcy is not necessarily the right answer if your financial problems are primarily cash flow due to a temporary situation that will improve, if most of your debt is non-dischargeable (student loans, recent taxes), if you have significant non-exempt assets you would lose in Chapter 7, or if you can negotiate settlements with creditors for less than full balance — which is often possible before the formal bankruptcy process and may be faster and less damaging to your credit. Consulting with a bankruptcy attorney before deciding is always advisable.