Bankruptcy Basics: Chapter 7 vs Chapter 13

Guide last updated: April 17, 2026. Hazard class: financial. Civic education by a Concerned Parent.

Bankruptcy has long-term financial, credit, and sometimes immigration consequences. This guide is civic information, not a recommendation to file. Before filing, consult a bankruptcy attorney. Many offer free initial consultations. Legal aid organizations help qualifying low-income filers.

The short version

Bankruptcy is a federal legal process that can discharge certain debts, stop creditor collection, and provide a fresh start. Two chapters are common for individuals:

Chapter 7 — discharges eligible unsecured debts in about 4-6 months; requires passing a "means test"; non-exempt property can be sold to pay creditors
Chapter 13 — 3-5 year repayment plan with partial discharge at completion; useful for saving a home from foreclosure or for higher earners

Not all debts can be discharged. Student loans, recent taxes, child support, and criminal restitution are generally not dischargeable. Filing affects credit for 7-10 years.

Chapter 7 — liquidation

Who it's for

People with primarily unsecured debt (credit cards, medical bills, personal loans) and limited income and assets. Must pass the "means test" — household income below state median OR disposable income insufficient to repay creditors.

What happens

Credit counseling required within 180 days before filing
Petition filed with bankruptcy court; automatic stay stops most collection
Trustee appointed
Meeting of creditors (341 meeting) about 30 days after filing
Non-exempt property can be sold to pay creditors (Illinois exemptions cover most essential property)
Discharge order issued about 4-6 months after filing

What gets discharged

Most unsecured debts: credit cards, medical bills, personal loans, utility bills in arrears, most judgments.

What does NOT get discharged

Student loans (hardship discharge possible but difficult)
Child support and alimony
Most taxes less than 3 years old
Criminal restitution and most fines
Debts incurred through fraud
Debts not listed in the petition
Debts for willful and malicious injury

Illinois exemptions (what you can keep)

$15,000 equity in homestead
$2,400 in motor vehicle
$1,500 in "wild card" (any property)
Necessary clothing, family pictures
Specific amounts in retirement accounts, insurance proceeds, Social Security, tools of trade

Chapter 13 — reorganization

Who it's for

People with regular income who want to catch up on mortgage arrears, save a home from foreclosure, or who have too much income to qualify for Chapter 7 but still need debt relief. Debt limits apply (approximately $465K unsecured, $1.4M secured as of 2024).

What happens

Credit counseling required within 180 days before filing
Petition and plan filed with bankruptcy court; automatic stay stops most collection
Trustee appointed
341 meeting of creditors
Court confirms the plan (3-5 years of monthly payments to trustee)
Debtor makes monthly payments under the plan
Discharge issued at completion of plan

What Chapter 13 can do that Chapter 7 cannot

Catch up on mortgage arrears over the plan period
Save a home from foreclosure
Cram down car loans (in some circumstances)
Pay priority taxes over the plan period
Available to debtors who don't pass Chapter 7 means test

Automatic stay

Filing bankruptcy automatically stops (stays) most creditor collection:

Wage garnishment
Bank levies
Foreclosure sales (temporarily)
Utility shutoffs
Repossession
Most collection calls and letters
Lawsuit filings or continuations

Creditors who violate the stay can be sanctioned. Some creditor actions can continue (child support, some tax actions).

Credit impact

Chapter 7 on credit report for 10 years from filing
Chapter 13 on credit report for 7 years from filing
Credit score drops significantly at filing
Secured credit often available after discharge
Many filers rebuild credit within 2-3 years with disciplined use

Costs

Chapter 7 filing fee: $338 (fee waiver or installments available for low-income filers)
Chapter 13 filing fee: $313
Attorney fees: $1,000-$3,500 for Chapter 7 (often payable in installments before filing); $3,500-$6,000 for Chapter 13 (usually paid through the plan)
Credit counseling: typically $25-$50

Legal aid organizations provide free Chapter 7 filings for qualifying low-income filers.

When bankruptcy is NOT the right tool

Debts are mostly student loans — generally not dischargeable
Debts are mostly child support — not dischargeable
Debts are mostly recent tax debts — not dischargeable
Assets exceed exemptions significantly — you'd lose property in Ch 7
You need to rebuild credit immediately — bankruptcy delays rebuilding
A specific issue can be resolved another way (debt validation, negotiation, settlement, FCRA dispute)

Immigration consequences

Bankruptcy itself is not an immigration bar. But specific fraud or willful misconduct in the bankruptcy process can create immigration issues. Also, bankruptcy filings are public records that can surface in immigration applications. Non-citizens considering bankruptcy should consult both a bankruptcy attorney and an immigration attorney.

Alternatives to consider first

Debt validation under FDCPA (especially for old or disputed debt)
Debt negotiation — many creditors settle for less than full balance
Nonprofit credit counseling — debt management plans
Statute of limitations — some debts can no longer be collected
Judgment-proof status — if your income is protected from garnishment (Social Security, VA benefits, some disability) and you have no significant assets, creditors may have nothing to collect even without bankruptcy

Free and low-cost help

Legal Aid Chicago — Consumer — 312-341-1070 (bankruptcy for qualifying low-income filers)
Greater Chicago Food Depository / Legal Assistance Foundation bankruptcy clinic
Northwestern Pritzker Law School — Bluhm Legal Clinic
Illinois Legal Aid Online — Bankruptcy — illinoislegalaid.org
National Association of Consumer Bankruptcy Attorneys — attorney directory, nacba.org