A discharge is the part most people picture when they think about bankruptcy: the balance stops being owed, and nobody can come after it. What catches filers off guard is how much never gets discharged in either chapter, including recent income tax debt, most student loans and unpaid child support.
Chapter 7 and Chapter 13 are the two routes most consumers use, and they treat income, property and loans in very different ways.
What a Discharge Cancels, and How Long It Takes
When a debt is discharged, you no longer owe it. The debts most likely to qualify are unsecured, meaning no asset backs them up: credit cards, medical bills. Secured debt is the opposite. A specific asset guarantees the loan, and a mortgage or car loan generally has to be paid in full unless you hand over the collateral, with some exceptions.
In most cases, filers don't repay everything. Under Chapter 7, creditors are paid from savings and from the proceeds of selling assets, and the leftover balance on eligible debt goes away. Under Chapter 13, creditors get what the repayment plan pays them, and the remaining eligible balance is discharged at the end.
Timing is where the two chapters look least alike. A Chapter 7 discharge usually arrives around four months after filing. A Chapter 13 discharge typically comes around four years after filing, and can take as long as five.
Chapter 13 Trades Time for Keeping Your Property
Chapter 7 is also called liquidation bankruptcy, because qualifying filers turn some assets over to the bankruptcy estate to be sold and the money handed to creditors. Non-retirement investment accounts, expensive cars or jewelry, and real estate that isn't your primary home are the usual targets.
Chapter 13 goes by wage earner's bankruptcy. Nothing gets liquidated. Instead, you work with the court and your creditors to build a three-to-five-year repayment plan, a wage earner plan, that pays back at least part of what you owe. The catch is the length of the commitment. Relief isn't fast, because the case isn't finished until the plan is.
Creditors often end up recovering more through Chapter 13 than they would have through Chapter 7, though that depends on how many assets a Chapter 7 filer had and what they fetched at sale.
Passing the Means Test Takes Two Income Calculations
Chapter 7 is built for people with limited income, and eligibility runs through a means test with two parts:
- The first calculation sets your income against the median for a household of your size in the state where you live. Coming in under that line clears this half, and Form 122A-1 is where the math happens.
- The second looks at what's left over once the necessary bills are accounted for, insurance, child support, the roof over your head, union dues you have no choice about paying, and asks whether that remainder is enough to cover the debt. Too little to cover it, and you pass. Form 122A-2 is the form for this one.
If your income is too high to pass, Chapter 13 is generally the remaining option. That reverses the usual framing. The choice between speed and keeping your property only exists for filers who clear the test; everyone else starts at Chapter 13 and works out whether the monthly payment is affordable.
Both chapters live in the federal bankruptcy code, so the core rules are much the same wherever you live. States add their own guidelines, especially around what happens to your assets. (Chapter 11 also exists, but it's mostly used by businesses restructuring their debts.)
State Exemptions Set What Chapter 7 Filers Keep
Not everything is up for sale in Chapter 7. Exempt property stays with you, and every state writes its own list of what's exempt and what isn't. Retirement savings sits firmly on the protected side, 401(k)s and IRAs included. So, typically, does a limited amount of equity in the home you live in, a car of modest value, whatever tools a trade requires to keep earning, and a portion of ordinary household belongings.
Because the lists differ by state, two households with almost identical finances can face very different answers on what they'd have to give up.
Mortgages and Car Loans Get Paid, Reaffirmed or Surrendered
Secured debt doesn't simply vanish. In Chapter 7, you generally pay these loans off or reaffirm them, promising to keep paying, if you want to keep the house, the car or whatever else is the collateral. Creditors sometimes agree to different terms, but that negotiation isn't a standard part of the process, and the court won't rewrite your loan.
Chapter 13 works much the same way for secured debt, with two extra tools that Chapter 7 doesn't offer.
Cutting a Car Loan to Market Value, Stripping a Second Mortgage
A cramdown cuts the balance of a secured debt down to the property's fair market value. Say your car is worth $2,000 and the loan balance is $3,000. With a cramdown, $2,000 stays secured and the other $1,000 becomes unsecured, treated like credit card debt inside your repayment plan. Since plans rarely repay unsecured debt in full, part of that car loan can end up discharged. A vehicle has to have been yours for at least 910 days before the bankruptcy to qualify. On real estate, the tool reaches investment property only, never the home you live in.
Lien stripping needs a primary home with at least two loans against it. The test is whether the house holds any value above the first mortgage. If the first mortgage balance is $250,000 and the home is worth $200,000, foreclosure would leave the second lender with nothing, so a junior loan, a second mortgage or a home equity loan, can be stripped off the property and folded in with the other unsecured debts in the plan.
Taxes, Student Loans and Support Payments Survive Either Chapter
Some balances stay with you no matter how the case ends:
- Certain tax debt, including payroll taxes and recent IRS debt for unpaid income taxes
- Student loans, unless you pass the Brunner test or meet similar criteria where you live
- Unpaid child support and alimony, unless the alimony was part of a divorce property division
- Fines, penalties and restitution from a crime, apart from fines meant to repay the government rather than punish
- Damages from a drunk driving accident you caused
Whether your particular debts are dischargeable is worth checking before anything else, since a case that leaves the bulk of your balances intact solves less than it appears to.
The Automatic Stay Halts Collection, but Not for Co-Signers
An automatic stay takes effect as soon as you file, and it stops creditors from continuing to collect, with limited exceptions such as a very recent prior bankruptcy. Collection calls have to stop. Foreclosures and repossessions can't move forward. Wage garnishment pauses. The formal exception is a motion for relief from the automatic stay, in which one creditor asks the court to clear it to resume collection on its own debt; granting that is the judge's call. Meanwhile, the pause creates room to negotiate or to get current on a debt and head off a foreclosure.
Some protection applies before any filing. The Fair Debt Collection Practices Act draws lines around how a collector may behave: calls belong in reasonable hours of the day, threats of legal action nobody intends to file are prohibited, and a collector told to stop phoning your workplace has to stop. Ask for proof of the debt and they owe you proof. A written request to cut off contact also has to be honored. That doesn't mean the account goes quiet, though. Work on it can continue out of your sight, and a lawsuit would still be served on you.
One wrinkle that's easy to miss: the stay protects the person who filed. A co-signer or joint borrower on the same loan generally remains on the hook, and collectors can keep pursuing them.
Who Qualifies, What's at Risk, How Long It Takes
| Point | Chapter 7 | Chapter 13 |
|---|---|---|
| Who can file | Filers who pass the means test | Wage earners who can make monthly payments over three to five years |
| Property | Non-exempt property is sold | Most property stays with the filer |
| Cramdown or lien stripping | No | Sometimes |
| Discharge timing | Around four months after filing | Around four years after filing, up to five |
| Also called | Liquidation bankruptcy | Wage earner's bankruptcy |
What Happens to Credit After a Discharge
Scores run on what lenders report, and a household that's underwater generates the same discouraging report every month: balance at the limit, payment late again. Each one pulls the number down. A discharge is its own hit to credit, a real one, but it shuts off that monthly supply of bad news. What comes next is small at first, a secured card, payments cleared on the date they're due, a file with something in it besides delinquency. The bankruptcy and the missed payments behind it don't vanish. They simply account for less of the picture as newer history stacks up.
Chapter 7 for Exempt Property, Chapter 13 for a Payment You Can Sustain
Bankruptcy isn't the only route out of unpayable debt. Debt settlement carries different consequences for credit, and court filings come with their own costs and paperwork.
Within the two chapters, Chapter 7 ends quickly, which suits filers whose income clears the test and whose property is largely exempt. Chapter 13 covers people with income above the test threshold, filers with non-exempt property they'd rather not lose, and cases where a cramdown or lien strip is on the table, with all of it depending on whether the monthly payment is sustainable for three to five years.
And whichever chapter a case runs through, the recent tax debt, the student loans and the support payments come out the far end unchanged.
