Bankruptcy in 2026: Chapter 7 vs. Chapter 13, and How to Choose

The Day the Phone Stops Ringing: What Bankruptcy Really Is

Imagine the collection calls just stop. The garnishment of your paycheck stops. The foreclosure clock stops. That is not a fantasy — it is what happens the moment you file for bankruptcy, because of a legal shield called the automatic stay. Bankruptcy is not a moral failure or the end of your financial life. It is a tool written into federal law to give honest people who are buried in debt a "fresh start."[14, 1]

For ordinary households, almost all consumer bankruptcy comes in two flavors. Chapter 7 wipes out most debts in about four months by selling off any property the law does not protect — and for most filers, nothing gets sold at all. Chapter 13 keeps your property and rolls your debts into a single court-supervised repayment plan that runs three to five years. One is a clean break; the other is a structured catch-up. This guide walks through both in plain language.[1, 2]

Why a 2026 guide? Because the numbers move. The dollar figures baked into the bankruptcy code were raised 13.2% on April 1, 2025, and the income tables that decide who qualifies were refreshed again for cases filed on or after April 1, 2026. Plenty of older articles quote figures that are now simply wrong. Below, every limit, fee, and threshold is the current one — and we will flag the traps where the internet still repeats stale numbers.[12, 9]

Chapter 7 vs. Chapter 13 at a Glance

The simplest way to tell them apart: Chapter 7 is about your past, Chapter 13 is about your future. Chapter 7 looks at what you own right now, takes anything the law does not protect, erases the rest of your eligible debt, and is over in months. Chapter 13 looks at what you earn going forward, asks you to pay what you can over three to five years, and then erases what is left. Lawyers call them "liquidation" and "reorganization."[1, 2]

Here is the quick comparison. Speed: Chapter 7 finishes in about four months; Chapter 13 takes three to five years. Cost to file: the court fee is $338 for Chapter 7 and $313 for Chapter 13. Who qualifies: Chapter 7 requires passing a "means test"; Chapter 13 requires a steady income and debts under set limits. Your house and car: Chapter 13 is built to let you keep them and catch up on missed payments; Chapter 7 protects them only if your equity fits inside an exemption.[5, 6]

Choosing is not just about which one you want — it is about which one you qualify for. Many people would prefer the fast, clean Chapter 7, but if they earn too much, the means test pushes them into Chapter 13. Others want to keep a home with a big mortgage arrears, which Chapter 7 cannot fix, so they choose Chapter 13 on purpose. The rest of this guide explains exactly how those doors open and close.[2, 17]

Chapter 7: The Clean Break

Chapter 7 is the bankruptcy most people picture. You file, and a court-appointed trustee takes charge of your case. The trustee can sell any property that is not protected by an exemption and hand the cash to your creditors. In exchange, almost all of your remaining eligible debts — credit cards, medical bills, old loans, deficiency balances — are discharged, meaning you no longer legally owe them.[1, 18]

Here is the part that surprises people: the great majority of Chapter 7 cases are "no-asset" cases, where the trustee finds nothing worth selling because everything the filer owns fits inside the exemptions. In other words, most people who file Chapter 7 keep all of their stuff and still get their debts erased. The "liquidation" rarely liquidates anything at all.[1]

The timeline is short. About a month after you file, you attend a brief "meeting of creditors" — usually a short question-and-answer session with the trustee, not a courtroom drama. If nothing is contested, the court grants your discharge roughly four months after you filed. For someone drowning in collection calls, that is a remarkably fast door out — which is exactly why Chapter 7 is the most common consumer bankruptcy.[4, 1]

The Means Test: Do You Qualify for Chapter 7?

Not everyone is allowed to use Chapter 7. To keep higher earners from wiping out debts they could partly repay, the law adds a gate called the means test. Step one is simple: take your average monthly income from the last six months, multiply by twelve, and compare it to the median family income for your household size in your state. If you are at or below the median, you pass — no further math — and you can file Chapter 7.[9, 17]

If your income is above the median, you are not out — you just have to do the longer calculation on Form 122A-2. It subtracts allowed living expenses, secured-debt payments, and certain other costs to find your "disposable income." A presumption of abuse (meaning Chapter 7 is presumed off-limits) kicks in only if that 60-month disposable income is at least $17,150, or is between $10,275 and $17,150 and enough to cover at least 25% of your unsecured debts. Below $10,275, there is no presumption.[17, 7]

Two numbers matter for 2026. Those thresholds — $10,275 and $17,150 — are the figures set by the April 1, 2025 adjustment; do not trust an article still quoting the old $9,075 and $15,150. And the median-income tables themselves changed: the U.S. Trustee Program applies refreshed Census data to cases filed on or after April 1, 2026. Always pull the table for your state and your filing date — your neighbor who filed last year used a different number.[12, 9]

Chapter 13: The Repayment Plan That Saves Your House

Chapter 13 is the opposite trade. Instead of giving up property, you keep everything and commit your future income to a repayment plan. You propose monthly payments to a trustee, who passes the money to your creditors. The plan runs three years if your income is below the state median and five years if it is above — and never longer than five. When you finish the payments, the court discharges whatever eligible debt is left.[2, 19]

Why choose the harder, slower path on purpose? Because Chapter 13 can do things Chapter 7 cannot. The biggest is saving a home: if you are behind on your mortgage, Chapter 13 lets you cure the arrears — spread the missed payments across the plan — while you keep making the regular payment, stopping foreclosure in its tracks. It is also the route for people who earn too much to pass the means test, or who have valuable property they would lose in Chapter 7.[2]

There is an eligibility ceiling, and the 2026 figure is a common trap. To file Chapter 13 your debts must sit under the limits in 11 U.S.C. 109(e): $526,700 in unsecured debt and $1,580,125 in secured debt. Watch out — for two years a temporary law set a single combined limit of $2.75 million, but that expired on June 21, 2024. The code reverted to the two separate limits, which then rose with the April 2025 adjustment to the figures above. Articles citing "$2.75 million" or "$465,275" are out of date.[13, 12]

What You Get to Keep: Exemptions

The fear that stops people from filing is "I will lose everything." In reality, the law lets you protect a list of basics through exemptions — dollar limits on the equity you can shield in a home, a car, household goods, tools of your trade, and more. Property that fits inside an exemption is yours to keep, in both Chapter 7 and Chapter 13. Only equity above the limits is at risk.[15, 1]

There are two exemption systems, and which one you use depends on your state. Some states make you use their own list; others let you choose the federal exemptions in 11 U.S.C. 522. The federal figures (current April 2025 through March 2028) include a $31,575 homestead, a $5,025 motor vehicle, and a "wildcard" of $1,675 plus up to $15,800 of unused homestead that you can apply to anything. State lists can be more or less generous, so the choice matters.[15, 12]

Here is reassuring news for your retirement. Most 401(k)s, pensions, and similar workplace plans are fully protected in bankruptcy, no dollar cap, and IRAs and Roth IRAs are shielded up to $1,711,975 under federal law (April 2025 to March 2028). That means filing bankruptcy almost never touches the nest egg you spent decades building. Do not cash out a 401(k) to pay debts you could erase — that often destroys protected money to chase a problem bankruptcy would solve.[15]

What It Costs and the Two Classes You Must Take

The court filing fee is modest: $338 for Chapter 7 and $313 for Chapter 13. If even that is out of reach, Chapter 7 filers whose income is below 150% of the poverty line can ask the court to waive the fee, and anyone can ask to pay it in up to four installments. Money should not be the wall that keeps a broke person out of bankruptcy — and the rules are written so it usually is not.[5, 6]

The law requires two short classes, and skipping either can sink your case. Before you file, you must complete a credit counseling session from a government-approved agency, taken within the 180 days prior. After you file, before you get your discharge, you must finish a debtor education course on managing money. Both are offered online or by phone, usually for a small fee that can be waived for low incomes, and each ends with a certificate you file with the court.[18, 10, 23]

The bigger cost is usually the attorney. You are allowed to file on your own — called filing pro se — and for a simple no-asset Chapter 7 some people do. But the U.S. Courts themselves warn that bankruptcy is legally complex and mistakes can cost you property or a discharge, so most people hire a lawyer. Chapter 7 attorney fees are commonly a flat amount paid up front; Chapter 13 fees are often folded into the plan, so you pay them over time.[8]

The Automatic Stay: Instant Relief the Day You File

The single most powerful thing bankruptcy does happens the instant you file, before any judge looks at your case. It is the automatic stay in 11 U.S.C. 362, and it is a federal court order that freezes nearly all collection activity. Wage garnishments stop. Foreclosure sales are halted. Repossessions, lawsuits, and the endless phone calls all have to stop the moment your case is filed. For many people, that first quiet evening is the real beginning of the fresh start.[14, 1]

The stay is broad, but not total. A few things push through it: most importantly, child support and alimony collection can continue, and certain criminal and tax matters are not stopped. And the protection can be weaker if you have filed before — if you had one bankruptcy dismissed in the past year, the stay may last only 30 days unless the court extends it; with two or more recent dismissals, the stay may not arise at all. The system rewards an honest first filing and guards against repeat gaming.[14]

Chapter 13 adds an extra shield that Chapter 7 lacks: the co-debtor stay. If a friend or relative co-signed a consumer debt with you, Chapter 13 generally stops creditors from chasing that person while your plan is alive. That can be the deciding factor for someone whose parent guaranteed a loan. If a fee spiral or a garnishment is what pushed you here, it is worth seeing on paper how a structured payoff would actually look before you decide.[20, 2]

What Bankruptcy Can and Cannot Erase

Bankruptcy is powerful, but it is not a magic eraser. It is excellent at wiping out unsecured consumer debt — credit cards, medical bills, personal loans, payday loans, and the leftover balance after a car or house is repossessed. For most filers, that is the entire problem, and a discharge makes it legally vanish. But a specific list of debts in 11 U.S.C. 523(a) survives bankruptcy, and knowing the list before you file prevents painful surprises.[16, 4]

The debts that usually cannot be erased include child support and alimony, most recent income taxes, court fines and criminal restitution, debts from fraud, and damages for injuring someone while driving drunk. Student loans sit in their own gray zone: they are nondischargeable unless you prove "undue hardship" in a separate court action. That bar is high, but it is not impossible — and the process is more navigable than it used to be.[16, 4]

On student loans specifically, the rules got friendlier in late 2022. The Justice Department and the Department of Education rolled out a streamlined process in November 2022: borrowers fill out an attestation form, and government lawyers use it to decide when undue hardship clearly exists and to agree to a discharge instead of fighting it. It is not automatic, and many loans still will not qualify — but if crushing student debt is your core problem, this path is worth raising with a bankruptcy attorney.[11]

Your Credit After Bankruptcy: The Truth About 7 and 10 Years

Yes, bankruptcy lowers your credit score and stays on your report for years. The federal Fair Credit Reporting Act lets credit bureaus report a bankruptcy for up to ten years from the filing date, and the CFPB confirms the ten-year ceiling. Here is the nuance almost every article gets wrong: that ten-year cap is the maximum the law allows, not a fixed sentence for every case.[21, 22]

In practice, the credit bureaus draw a line by chapter. A Chapter 7 typically stays for the full ten years. A completed Chapter 13 is usually removed after seven years, because the bureaus voluntarily reward the partial repayment — even though the law would let them keep it for ten. So the "seven years" you read about Chapter 13 is an industry practice, not a statute. It is a small, real advantage of choosing the repayment route.[21, 22]

The more important truth is that a score starts recovering the day your debts are gone. With your old balances erased, your debt-to-income ratio resets, and on-time behavior begins rebuilding immediately. People often qualify for a secured credit card within months and an auto loan within a year or two. The discharge is not the end of your credit story — for many, it is the first honest page of a new one. The smartest first move is to redirect the money that used to vanish into payments toward savings.[22]

Bankruptcy vs. the Alternatives

Bankruptcy is rarely the first thing to try. Before filing, it is worth weighing the gentler tools: a debt management plan through a nonprofit credit counselor, a balance-transfer or consolidation loan, or directly negotiating a settlement with creditors. If your debts are modest and your income is steady, a disciplined payoff plan can clear them without a court filing on your record. The FTC warns, though, to avoid any "debt relief" company that demands fees up front before it does anything — that is a hallmark of a scam.[23]

There is a tax twist that often tips the scales toward bankruptcy. When a creditor settles a debt for less than you owe, the forgiven amount is usually treated as taxable income, and you may get a Form 1099-C. Debt erased in bankruptcy is different: it is not taxable income at all, under the tax code and IRS Publication 908. For someone with a large balance, that difference between a settlement tax bill and a tax-free discharge can be thousands of dollars.[24, 25]

So the honest decision tree looks like this. If a realistic payoff or a fair settlement clears the debt in a couple of years without sinking your essentials, try that first. If the math never works — if the balances are simply larger than any plan can carry, or a wage garnishment or foreclosure is already moving — bankruptcy is the tool built for exactly that moment. The goal is not to avoid bankruptcy at all costs; it is to use the right tool for your actual numbers.[23]

How Filing Actually Works, Step by Step

The process is more orderly than the dread suggests. First, you gather your financial life on paper: income, every debt, everything you own, and recent tax returns. Second, you take the pre-filing credit counseling session. Third, your petition is filed with the bankruptcy court — along with detailed schedules, a Statement of Financial Affairs, and the means-test form. The instant that petition hits the docket, the automatic stay switches on.[3, 1]

About a month later comes the meeting of creditors, run by your trustee. You answer questions under oath about your forms; in a routine consumer case it is brief and creditors rarely show up. In Chapter 7, the discharge usually follows a couple of months after that. In Chapter 13, the court holds a confirmation hearing to approve your plan, and then you make your monthly payments for three to five years before the discharge arrives at the end.[2, 4]

One administrative step trips people up: you must finish the second class — the debtor education course — and file its certificate, or the court can close your case without a discharge even after you did everything else right. Put it on your calendar the week you file. And keep proof of both classes; a missing certificate is one of the most common, and most avoidable, reasons a smooth case stalls.[18, 8]

Common Myths and Costly Mistakes

Start with the myths, because fear keeps people in debt longer than the law requires. "I will lose everything" is false for most filers, who keep their home, car, and belongings through exemptions. "My spouse has to file too" is false — one spouse can file alone, though shared debts deserve a careful look. "Bankruptcy lasts forever" is false — it falls off your credit report in seven to ten years, and your score begins healing far sooner.[22, 15]

Now the mistakes, because a few moves in the months before filing can wreck an otherwise clean case. Do not run up cards or take cash advances you do not intend to repay right before filing — that can be treated as fraud and survive the discharge. Do not pay back a relative and stiff everyone else; the trustee can claw that "preference" back. Do not hide assets or transfer property to a friend to "protect" it. Honesty is not just ethical here — it is the legal foundation of your discharge.[18, 16]

The last mistake is waiting too long for the wrong reason. People often drain a protected 401(k), or let a lawsuit ripen into a wage garnishment, while trying to avoid a bankruptcy that would have protected them sooner. Filing is not a step you should rush, but it is also not one to fear into paralysis. Talk to a qualified bankruptcy attorney early; most offer a free first consultation, and knowing your real options is the opposite of giving up.[8, 23]

Frequently Asked Questions About Bankruptcy in 2026

Below are the questions people ask most before they file. The short answers here are a starting map, not legal advice — your state, your income, and your exact debts decide the details, so confirm your own situation with a qualified bankruptcy attorney or a government-approved credit counselor.