Consumer bankruptcy in the United States generally proceeds under one of two chapters. They differ not in severity but in mechanism, and eligibility for one is tested.
What a Chapter 7 case does
A Chapter 7 case creates an estate from the debtor's property, from which a trustee may liquidate assets that are not protected by exemptions.
State and federal exemption schemes protect categories of property, and in many consumer cases the estate contains nothing available for distribution.
The case typically concludes within months with a discharge releasing the debtor from personal liability on covered debts.
What a Chapter 13 case does
A Chapter 13 case proposes a plan under which the debtor makes payments from future income over a period of years, administered by a trustee.
The plan must satisfy statutory requirements, including that unsecured creditors receive at least what they would have received in a liquidation.
Discharge follows completion of the plan payments, which means the case runs far longer and depends on sustained ability to pay.
The means test and eligibility
Access to Chapter 7 for individuals with primarily consumer debts is subject to a means test comparing income against state medians and allowed expenses.
Where the test indicates ability to repay, the case may be presumed abusive, pushing the debtor toward Chapter 13 or dismissal.
Chapter 13 carries its own eligibility conditions, including limits on the amount of debt and a requirement of regular income.
What each chapter does with secured debt
Liquidation does not by itself remove a lien. A creditor holding a mortgage or car loan retains its security interest even after personal liability is discharged.
Chapter 13 allows arrears on a secured debt to be cured over the plan period, which is why it is used where the goal involves retaining property.
This difference in treatment of secured obligations is often the deciding factor rather than the comparative length of the two processes.
The automatic stay and its limits
Filing triggers an automatic stay halting most collection activity, foreclosure and litigation, effective immediately on filing.
The stay is not unlimited. Creditors may seek relief from it, and repeat filings within defined periods receive reduced or no stay protection.
Certain obligations are excepted from discharge entirely under the statute. Bankruptcy law is technical and jurisdiction-specific, and outcomes turn on facts an attorney must review.