Bankruptcy Chapter 7 vs 13 in the USA – what it covers, costs, how to choose (2026)

What is bankruptcy

Bankruptcy is a federal legal proceeding under the U.S. Bankruptcy Code (Title 11 of US Code) that provides the debtor with a "fresh start" by:

• Eliminating (discharge) most debts
• Restructuring payments of others
• Automatic Stay – immediate halt to collection actions, lawsuits, wage garnishments, foreclosures

Important: bankruptcy is a federal proceeding (federal court), but some exemptions are state-specific. Each person can file once every 8 years (Ch7) or 2-4 years (Ch13).

For individuals – 3 types

Chapter 7 (most popular – "liquidation bankruptcy")

• ~70% of bankruptcy cases
• 3-4 month procedure
• Trustee sells non-exempt assets
• Proceeds pay creditors
• Remaining debts discharged
• Most people: NO assets sold (everything exempt)
• Discharge typically 60-100 days from filing

Chapter 13 (reorganization, 3-5 year plan)

• For individuals with regular income
• 3-5 year payment plan based on income and debts
• Trustee distributes payments to creditors
• After completion – discharge remaining debts
• You keep all assets (including non-exempt)
• Can catch up on mortgage/car payments
• Used for: keeping a home before foreclosure, paying tax debt, when income too high for Ch7

Chapter 11 (rare for individuals)

• Mainly for businesses, corporations
• May be for individuals with very high debt
• Very expensive process ($10k+ attorney fees)
• Complicated – rare for individuals

Chapter 7 – details

Means test eligibility

To qualify for Chapter 7, you must pass the means test – it compares your income to the state median.

State	Median income for a family of 4 (2024)
NY	$132,884
NJ	$144,064
CA	$129,207
FL	$98,580
IL	$117,247
MA	$140,762
TX	$104,144

Step 1: income below median? → you qualify immediately for Ch7.

Step 2: income above median? → a second means test checks disposable income. If little remains after allowed expenses → Ch7 OK. Otherwise → you must go Ch13.

What is dischargeable in Ch7

• Credit card debt – fully dischargeable
• Medical bills – fully dischargeable
• Personal loans – fully dischargeable
• Utility bills – fully dischargeable
• Past rent – fully dischargeable
• Pay-day loans – fully dischargeable
• Old tax debt (3+ years) – dischargeable with conditions
• Most lawsuit judgments – dischargeable

What is NOT dischargeable

• Student loans – generally NO (with "undue hardship" exception, rarely granted)
• Recent tax debt (under 3 years) – generally NO
• Child support, alimony – NEVER
• Criminal fines, restitution – NO
• Drunk driving injury judgments – NO
• Debts incurred by fraud – NO (if creditor shows fraud)
• Recent credit card charges for luxury items ($800+ in 90 days before filing) – challenged
• Domestic support obligations – NEVER

Exemptions – what you keep

Federal exemptions vs state exemptions (depends on the state you choose):

Federal exemptions 2026 (selected)

• Homestead (home equity): $27,900 single / $55,800 married
• Motor vehicle: $4,450
• Household goods, furniture: $700/item, $14,875 total
• Jewelry: $1,875
• Tools of trade: $2,800
• Life insurance: $14,875 unmatured + future death benefit dependents
• Retirement accounts (IRA, 401k): up to $1.5M IRA, unlimited 401k
• Wildcard: $1,475 + unused homestead

State exemptions (examples)

State	Homestead	Vehicle
NY	$179,950 NYC area, $89,975 elsewhere	$4,825
NJ	Federal exemptions only	$4,450
FL	UNLIMITED (no value limit)	$1,000
TX	UNLIMITED (10 acres urban, 100 rural)	$50,000 per family
CA	$600k+ (system 1) or $31,950 + wildcard $31,950 (system 2)	$3,625

Florida and Texas have "unlimited homestead" – many people move to these states before bankruptcy (legally with conditions – requires 730+ days residency).

Chapter 7 process – step by step

Step 1: Credit counseling (before filing)

You must participate in a 1-hour credit counseling course with an approved provider within 180 days before filing. $50-150. Online OK.

Step 2: Filing petition

Attorney prepares (50-200 pages of documents):

• Schedule of assets
• Schedule of liabilities
• Statement of financial affairs
• Means test calculation
• Schedule of income and expenses

Filing fee: $338 (2026).

Automatic Stay activates at the moment of filing – all collections, garnishments, lawsuits STOP.

Step 3: 341 meeting of creditors

About 30-45 days after filing. Meeting with trustee (federal trustee):

• Trustee asks questions under oath
• Creditors may ask questions (rarely appear)
• 10-30 minutes typically
• Can be conducted in Polish with a translator

Step 4: Financial management course

Second mandatory course (2 hours) after filing, before discharge. $20-100. Online OK.

Step 5: Discharge

Typically 60-100 days after the 341 meeting. Court issues discharge order – debts officially wiped out.

Chapter 13 – details

Eligibility

• Regular income
• Unsecured debts < $465,275 (2024)
• Secured debts < $1,395,875 (2024)
• With income above median (failed Ch7 means test)

When to use Ch13

• To keep a home before foreclosure (catch up missed payments)
• To keep a car before repossession
• Paying tax debt
• To keep non-exempt assets
• High disposable income, but want a manageable plan

Plan payment

3-year plan (if below median) or 5-year plan (above median).

The plan must cover:

• Priority debts (taxes, support) – 100% paid
• Secured debt arrears (catch up missed mortgage, car)
• Unsecured creditors – % depending on disposable income

Example: $50k credit card debt + $10k missed mortgage payments + $5k tax debt.

5-year plan paying $1,000/month = $60k total. Mortgage caught up + taxes paid + ~50% credit card discharged at end.

Chapter 13 process

1. Credit counseling (same as Ch7)
2. Filing petition + proposed plan
3. 341 meeting
4. Confirmation hearing (court approves plan)
5. Start payments to trustee
6. Trustee distributes to creditors
7. 3-5 years of consistent payments
8. Financial management course
9. Discharge

Bankruptcy costs

Chapter 7

• Filing fee: $338 (2026)
• Credit counseling + financial management courses: $50-250 total
• Attorney fees: $1,500-3,500 typically
• Total: $2,000-4,000

Chapter 13

• Filing fee: $313 (2026)
• Courses: $50-250
• Attorney fees: $3,500-7,000 (often paid through plan over 3-5 years)
• Total: $4,000-7,500

What if you can't afford an attorney

• Pro bono attorneys – some regional bar associations match with attorneys
• Legal aid – free for low-income individuals
• Self-filing (Pro Se) – possible but very difficult, mistakes = dismissal
• Filing fee waiver – possible for low-income individuals

Impact on credit

Chapter 7

• Reported for 10 years on credit reports
• Score drop: 100-200 points immediate
• Most rebuild in 1-2 years after discharge
• Some lenders specialize in post-bankruptcy lending

Chapter 13

• Reported for 7 years on credit reports
• Similar score drop, but "completed" Ch13 is better than defaulted debts

After discharge – rebuilding

• You can get a secured credit card 1-3 months after discharge
• Auto loans available with high APR 6-12 months after
• FHA mortgage available 2 years after Chapter 7 discharge (or 1 year after Ch13 completion)
• Conventional mortgage 4 years after Ch7
• Full credit recovery 5-7 years for most

Alternatives before considering bankruptcy

Debt settlement

Negotiate with creditors for reduced payment (30-50% of original balance). May suffice without bankruptcy.

Debt consolidation loan

Personal loan covering all debts for one lower interest payment. Requires decent credit.

Balance transfer cards

Move debt to a 0% APR card for 12-21 months. Pay off during this time. Requires good credit.

Credit counseling Debt Management Plan

Nonprofit credit counseling agencies negotiate lower interest rates, establish a 3-5 year plan. NACA, ACCC, local nonprofits.

Hardship programs

Some creditors offer 6-12 month hardship programs (no payments, reduced interest) during a crisis.

When bankruptcy is the right decision

Pros

• Total debt $20k+ (otherwise not worth the cost)
• Low chance of full repayment in 5 years from own income
• Lawsuits, garnishments, foreclosure pending
• Mental health stress overwhelming
• Wage garnishment already active
• Need to keep an asset (Ch13 for home before foreclosure)

Cons

• Expensive upfront ($2k-7k)
• Credit impact 7-10 years
• Possible loss of non-exempt assets (Ch7)
• Publicly available (anyone can search Pacer.gov)
• Some professions – issues (security clearance, board certifications)
• May affect future employment (some employers check)

Polish specific scenarios

Old medical bill ER

$50,000 medical bill from ER 5 years ago, going to collection, lawsuit threatened. Ch7 discharges the entire amount. Total cost $2,500 attorney + $338 filing = $2,838. Save $47,162.

Polish loans

Polish debts (BIK debts) are NOT typically included in US bankruptcy. A Polish lender would have to appear in US court – very rare. Polish debts are generally NOT discharged in US bankruptcy but also not reachable by US creditors.

Immigration status and bankruptcy

• Bankruptcy does NOT directly affect immigration status
• Is NOT a "public charge" (per public charge rule 2022)
• Does NOT block naturalization (no "good moral character" issue)
• Is NOT a deportable basis
• LPR and undocumented can file bankruptcy

Immigration status – some nuances

• Naturalization application – court may ask about financial history, but bankruptcy does not disqualify
• Sponsor I-864 obligations are NOT discharged by bankruptcy

Joint filing for married couples

Polish couples often have shared debts. You can file joint Ch7 or Ch13 – one filing fee, doubles exemptions. Often more efficient.

Traps and warnings

Do not do before bankruptcy

• Transfer assets to family to hide (fraud – denied discharge)
• Pay back family loans ($600+ in 90 days before filing – "preferential transfer", trustee recovers)
• Spend large amounts on credit cards just before filing ("luxury goods" presumption fraud)
• Cash out retirement to pay debts (then keep nothing post-bankruptcy)

Common mistakes

• Filing too early (still hope of repayment) or too late (after garnishment started)
• Not reporting all debts (must list ALL)
• Hiding assets (federal crime if intentional)
• Wrong chapter choice – attorney consultation is crucial
• Filing pro se (without attorney) when the case is complicated

Polish attorneys specializing in bankruptcy

Chicago

• Many Polish-speaking bankruptcy attorneys in Avondale, Niles, suburbs
• Polish Yellow Pages – search for "bankruptcy" or "prawo upadłościowe"

NYC/NJ

• Greenpoint area attorneys
• NJ – Linden, Garfield, Wallington attorneys

National

• NACA (National Association of Consumer Bankruptcy Attorneys) directory
• Many offer free initial consultation

Practical tips

• Free consultation first – most attorneys offer free 30-60 min
• Print credit report before consultation – easier for attorney to assess
• List all debts – credit cards, medical, personal loans, utilities, taxes, EVERYTHING
• Tax returns last 2 years – required for filing
• Pay stubs last 6 months – required
• Do NOT wait for garnishment – filing earlier protects more income
• Co-signers – non-dischargeable debts will be collected from co-signer (Ch13 may protect)
• Joint bankruptcy for married couples – typically more efficient
• Save proof of payments – credit counseling, financial management courses
• Post-discharge – check credit reports 6-12 months later – all discharged debts should show "discharged in bankruptcy"
• Rebuilding – Discover Secured / OpenSky in the first year post-discharge