Consumer Bankruptcy

There are really two basic types of consumer bankruptcy. In rare cases, an individual will file Chapter 11, it’s typically down to Chapter 7 and 13.

Chapter 7 or Chapter 13?

The choice of chapter depends on many factors individual to your situation, and is one of the most important reasons to get good legal advice from bankruptcy lawyers before filing. Which chapter is best depends on the nature of your debt and the nature and value of your assets.

In general, the choice of chapter is not yours to make but is governed by the “bankruptcy means test.” If your monthly overhead (mortgage or rent + insurance + taxes, etc.) exceeds your monthly net income, then you may qualify for a Chapter 7. If your monthly net income exceeds your monthly overhead, then you qualify for a Chapter 13. This still means you must now pass the means test.


Many individuals file Chapter 7 bankruptcy, but it’s not always your choice, as one must qualify. The debtor receives a discharge of most unsecured debts within several months of filing the case. If the debtor’s income appears high enough to permit some repayment of debt, the trustee or the court may move to dismiss the case for “substantial abuse”. The theory is that to permit someone with the ability to repay to file Chapter 7 and avoid repayment abuses the bankruptcy system. This is termed “substantial abuse” – catch phrase with the U.S. Congress.

It is important to know what the legal form of the business is if your debt is mixed business and consumer. Corporations and partnerships can file Chapter 7 and Chapter 11; the choice depends on whether the business can be reorganized in Chapter 11 or will be liquidated in Chapter 7. Bankruptcy treats sole proprietorships as just one kind of asset of the individual who owns them. Consequently, the owner of a troubled business must file an individual bankruptcy, including all of his assets and liabilities, personal and business, to obtain bankruptcy court protection.


Chapter 13 bankruptcy is for consumers who have positive cash flow. It’s frequently a better choice if you have debts that are not dischargeable in Chapter 7; if you are in default on mortgages and want to stop foreclosure… or car payments; if you have more property than can be exempted from creditors in Chapter 7; or if you owe taxes or other debts that are not dischargeable in Chapter 7.

To be eligible for Chapter 13, you must have regular income and debts below a certain level.

Debtors choose to file a repayment plan under Chapter 13 when

  • their current monthly income is higher than the median income for their state
  • debts aren’t dischargeable in Chapter 7 ( such as taxes, child support, fraud judgments)
  • liens that are larger than the value of the assets securing the debt
  • they have years of unfiled taxes
  • behind on car or house payments
  • assets are worth more than the available exemptions.


The scope of the discharge is different in each chapter. The Bankruptcy Code makes the Chapter 13 discharge more encompassing, to encourage individuals to use Chapter 13 to repay a portion of their debts.

Put most simply, most unsecured debt is dischargeable. Most secured debt survives bankruptcy as a charge on the property to which it attaches unless a court order modifies the lien.

Click here to read more about Chapter 7 Liquidation Bankruptcy

Click here to read more about Chapter 13 Wage Earner Bankruptcy.