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In the United States, consumers can choose between two forms of bankruptcy: “Chapter 7” and “Chapter 13.” Learn more about them below.
Chapter 7 bankruptcy (liquidation)
Chapter 7 is what most people think of when they hear the word “bankruptcy.” A Chapter 7 bankruptcy wipes out (or “discharges”) your debts. In exchange for this benefit, you must be willing to give up any property that is not “exempt” to pay your creditors. In most cases, all of your property will be exempt. But if you have property that is not exempt, it will be sold and the money from the sale will be used to pay your debt. (If there is any money left over after paying your creditors it will be returned to you, but this is very rare.)
These are factors that may make Chapter 7 bankruptcy a good choice.
- You want to quickly discharge your debt and get a “fresh start.”
- All or most of your assets are “exempt.” Assets are things you own. If an asset is exempt, it means you can keep it — with or without a bankruptcy. By law, exempt income and property cannot be taken to pay for a debt. See if your assets are on this list of exempt assets.
- You make less than the state median income. As of November 1, 2024, for one person in Vermont that’s $74,744 per year; for a family of two it’s $91,816; for three it’s $115,552; and for four it’s $138,410 per year. If you make more than that, bankruptcy law states that you must pass a "means test" to file for chapter 7. You would fill out a form detailing your income and regular expenses. The bankruptcy court would review this and determine whether the consumer can file let you know if you can file a Chapter 7 case. A lawyer can help you figure your income according to the rules.
These are situations that may make Chapter 7 bankruptcy a bad choice.
- You have filed a Chapter 7 bankruptcy case within the last 8 years. (A consumer can only file one Chapter 7 bankruptcy case within 8 years.)
- You have important assets that are not exempt that you might lose in bankruptcy.
- You make much more than the state median income. See details in the section above.
- You are not able to pay the $338 filing fee or fees for a bankruptcy attorney. If you have significant financial hardship, you can ask the bankruptcy court to waive the filing fee or allow payments to be made in installments. However, a fee waiver is not guaranteed. For many people, the combination of the filing fee and bankruptcy attorney fees make the prospect of filing bankruptcy difficult.
Chapter 13 bankruptcy (debt adjustment)
With Chapter 13, you file a plan showing how you will pay off some or all of your past-due debts along with your current debts over the next three to five years. The major difference between a Chapter 7 case and a Chapter 13 case is that under Chapter 13 you may keep valuable property — such as your home and/or car — but only if you can make the plan payments in addition to your monthly payments. You will also need enough income to pay your necessary living expenses.
These are factors that may make Chapter 13 bankruptcy a good choice.
- You want to keep certain assets you own that are not “exempt,” such as a house.
- You have a regular, reliable source of income.
- You do not pass the Chapter 7 means test, described above.
These are situations that may make Chapter 13 bankruptcy a bad choice.
- You do not have steady or regular income.
- You qualify for Chapter 7 and all of your assets are exempt.
- You want to quickly discharge your debt and get a “fresh start.”
Next step
After reading this information, do you want to keep exploring bankruptcy?
YES: I want to learn more about Chapter 7 or Chapter 13 bankruptcy.
NO: I want to learn more about debt collection and managing debt.
