Financial difficulty can happen to anyone. A job loss, a medical emergency, a divorce, or a business setback can quickly make debts unmanageable. Bankruptcy is a legal process created by federal law to give honest individuals a fresh start, and for most consumers, the choice comes down to two options: Chapter 7 and Chapter 13. For the clients we serve considering bankruptcy protection, understanding the difference between the two is an essential first step.

Chapter 7: A Fresh Start Through Liquidation

Chapter 7 is often called "liquidation" or "straight" bankruptcy. When you file, a court-appointed trustee reviews your assets. The trustee may sell any property that is not protected by an exemption and distribute the proceeds to creditors (11 U.S.C. §§ 704, 726). In practice, however, many Chapter 7 debtors keep all or nearly all of their property because it is fully protected by exemptions.

At the end of the case, the court typically grants a discharge, which permanently releases you from personal liability for most debts, such as credit cards, medical bills, personal loans, and deficiency balances (11 U.S.C. § 727). Creditors are permanently barred from trying to collect discharged debts (11 U.S.C. § 524). Most Chapter 7 cases are completed within about four to six months of filing.

Who qualifies? Eligibility for Chapter 7 depends in part on the "means test" (11 U.S.C. § 707(b)). If your household income is below the median income for a household of your size in California, you generally qualify. If your income is above the median, the means test considers your allowable expenses to determine whether you have enough disposable income to repay a meaningful portion of your debts. If so, Chapter 13 may be the appropriate path.

Chapter 13: A Plan to Reorganize and Repay

Chapter 13 is a reorganization for individuals with regular income. Rather than liquidating assets, you propose a repayment plan lasting three to five years, depending on your income (11 U.S.C. §§ 1322(d), 1325(b)(4)). You make a single monthly payment to the Chapter 13 trustee, who distributes funds to your creditors. After you complete the plan, the court grants a discharge of most remaining debts covered by the plan (11 U.S.C. § 1328(a)).

Chapter 13 offers powerful tools that Chapter 7 does not, including:

• Saving your home from foreclosure. You may cure missed mortgage payments over the life of the plan while keeping up with current payments (11 U.S.C. § 1322(b)(5)).
• Removing certain second mortgages. In the Ninth Circuit, a junior mortgage or home equity line that is wholly unsecured because the home is worth less than the senior loan balance may be "stripped off" and treated as unsecured debt (In re Zimmer (9th Cir. 2002) 313 F.3d 1220).
• Reducing certain car loans. In some circumstances, such as a vehicle purchased more than 910 days before filing, the secured portion of the loan may be reduced to the vehicle's current value (11 U.S.C. § 1325(a)).
• Protecting co-signers. The Chapter 13 "co-debtor stay" can protect friends or family members who co-signed a consumer debt while your plan is in effect (11 U.S.C. § 1301).
• Protecting non-exempt assets. If you have property that would not be fully protected in Chapter 7, Chapter 13 may allow you to keep it by paying creditors at least what they would have received in a Chapter 7 liquidation (11 U.S.C. § 1325(a)(4)).
• Managing tax and support debts. Priority debts, such as certain recent taxes and domestic support arrears, can be paid over the life of the plan (11 U.S.C. § 1322(a)(2)).

Who qualifies? Chapter 13 is available to individuals with regular income whose debts fall below federal limits. For cases filed on or after April 1, 2025, those limits are $526,700 in unsecured debt and $1,580,125 in secured debt (11 U.S.C. § 109(e)). These amounts are adjusted every three years.

Protecting Your Property: California Exemptions

In both chapters, exemptions determine what property you can protect. California has opted out of the federal exemption scheme, so California debtors must choose between two state exemption systems (Code Civ. Proc., § 703.130):

• System 1 (Code Civ. Proc., § 704.010 et seq.) includes the homestead exemption, which is often the better choice for homeowners with significant equity. For 2026, the range is approximately $371,000 to $743,000.
• System 2 (Code Civ. Proc., § 703.140, subd. (b)) includes a smaller homestead exemption but a substantial "wildcard" exemption that can be applied to any property. It is often a better choice for renters or people with little home equity.

Choosing the right exemption system is one of the most important decisions in a California bankruptcy case, and the right choice depends on your specific assets.

Debts That Bankruptcy Generally Does Not Eliminate

Some debts are generally not dischargeable in either chapter, including domestic support obligations such as child support and alimony, most recent tax debts, criminal fines and restitution, and debts for death or personal injury caused by driving while intoxicated (11 U.S.C. § 523(a)). Student loans can be discharged only if repaying them would impose an "undue hardship" (11 U.S.C. § 523(a)(8)). Chapter 13 provides a somewhat broader discharge than Chapter 7 for certain types of debts (11 U.S.C. § 1328(a)).

Requirements and Timing Considerations

• Credit counseling. Before filing under either chapter, you must complete a credit counseling course from an approved agency within the 180 days before filing (11 U.S.C. § 109(h)). You must also complete a financial management course before receiving a discharge.
• Prior discharges. You cannot receive a Chapter 7 discharge if you received one in a case filed within the previous eight years (11 U.S.C. § 727(a)(8)). You cannot receive a Chapter 13 discharge if you received a Chapter 7 discharge in a case filed within the previous four years, or a Chapter 13 discharge in a case filed within the previous two years (11 U.S.C. § 1328(f)).
• Automatic stay. Under both chapters, filing immediately triggers the automatic stay, which halts most collection activity, including lawsuits, wage garnishments, and foreclosure sales (11 U.S.C. § 362(a)).
• Credit reporting. A bankruptcy may appear on your credit report for up to ten years (15 U.S.C. § 1681c(a)(1)), although many people begin rebuilding credit soon after their case concludes.

Side-by-Side Comparison

Which Option Is Right for You?

Chapter 7 is often the right choice for people with limited income, few non-exempt assets, and primarily unsecured debt who want a fast fresh start. Chapter 13 is often the better choice for people who are behind on their mortgage or car payments and want to keep the property, who have significant non-exempt assets, who have income above the median, or who need to address tax or support arrears over time. The right decision depends on your income, assets, debts, and goals, and on careful planning before your case is filed.