Chapter 7 vs. Chapter 13 Bankruptcy in California: Which Option Is Right for You?
There are two main types of bankruptcy for individuals in California: Chapter 7 and Chapter 13.
Chapter 7 is often known as a “liquidation” or “fresh start” bankruptcy, as it clears unsecured debt, and while the trustee can sell non-exempt assets, California law includes various exemptions.
Chapter 13, also known as “reorganization” or “wage earner” bankruptcy, lets debtors structure a repayment plan and keep most of their assets.
The terms and processes are very different, so which option is best for your situation?
What Is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is by far the most common type of bankruptcy in California:
- Filing for Chapter 7 automatically initiates an “automatic stay” that stops creditor harassment and related lawsuits.
- The debtor must pass a means test to prove that their income is below the median.
- A court-appointed trustee liquidates the debtor’s non-exempt assets.
- The debtor’s unsecured assets, including credit cards, are cleared.
Exempt and Non-Exempt Assets in Chapter 7 Bankruptcy
While it’s commonly assumed that bankruptcy leads to complete loss of assets, there are actually a number of exemptions—things that the trustee can’t liquidate.
California has two exemption laws: System 1 (704) and System 2 (703), and you must choose the one that works best for you:
- System 1 is best suited for filers with substantial home equity, as it has a sizeable homestead exemption of between $371,547 and $743,459 as of 2026 (changes annually and depends on the local median home value). It also has an exemption for a motor vehicle, jewelry and artwork, and unmatured life insurance policies.
- System 2 is better for those with limited home equity, but includes a wildcard exemption that covers any unused homestead up to $36,750.
There are maximum amounts for all exemptions, and these are subject to change. A bankruptcy attorney can assess your financial situation and help you find the best option.
What Is Chapter 13 Bankruptcy?
With Chapter 13 bankruptcy, a debtor with a regular income agrees to a repayment plan that covers some or all of their debts. A debtor retains most of their assets and doesn’t need to pass a means test.
Although it’s more suitable for filers with significant assets that they want to protect, Chapter 13 is a much longer process, with repayment plans spanning 3 to 5 years. As a result, legal fees tend to be higher.
Key Differences Between Chapter 7 and Chapter 13
Both Chapter 7 and Chapter 13 bankruptcy grant an automatic stay, preventing creditors from harassing you. The courts will also assign a trustee in both cases. The difference lies in how your debts are repaid.
With Chapter 7, your non-exempt assets are liquidated, and a trustee uses the funds to repay creditors. You don’t have to worry about unsecured debts (credit cards, medical debt, unsecured personal loans), and it generally only takes a few months. However, it has a significant impact on your credit score, and it will remain for up to 10 years.
With Chapter 13, you may only need to pay a portion of your debts, including tax debts, child support, and alimony. It’s a repayment plan, typically structured over 3 to 5 years, and while it can remain on your credit score for up to 7 years, the fact that you’re repaying creditors in that time can have less of an impact on your credit score.
Who Qualifies for Chapter 7 Bankruptcy in California?
Chapter 7 filers who earn more than the median average for California must first complete a means test. Calculate your average household income over the last six months to find your monthly income, and then multiply by 12 for your annual income.
You can deduct some expenses, such as those related to health and anything you’re legally required to pay, but you must include income from rental properties, alimony/child support, dividends, and workers’ compensation benefits, along with your gross wages.
Who Qualifies for Chapter 13?
To qualify for Chapter 13 bankruptcy in California, your secured and unsecured debts must fall under the thresholds. These amounts are adjusted periodically, but in 2026, they stand at $1,580.125 for secured debt and $526,700 for unsecured debt.
You must also prove that you have enough income to meet your repayment obligations.
What Happens to Your Property and Assets?
Provided your home falls under the exemption limits for Chapter 7, you can keep it. As Chapter 13 focuses more on repayments, your home is also protected. However, if you file for Chapter 7 bankruptcy and your home exceeds the allowed exemption limit, it may be sold to repay your debts. You will then receive the exemption amount in cash.
Similar rules apply to other assets—you keep the exemption amount, and the rest goes to your creditors.
Pros and Cons of Chapter 7 Bankruptcy
Pros
- It clears most of your unsecured debts.
- It typically takes just a few months.
- It stops creditors from harassing you.
- There are multiple exemptions in California that allow you to keep many assets.
Cons
- You must pass a means test.
- Your non-exempt assets will be sold to repay creditors.
- The filing stays on your credit report for up to 10 years.
Pros and Cons of Chapter 13 Bankruptcy
Pros
- You can retain most of your assets.
- It may have less of an impact on your credit score over time.
- It stops lawsuits and creditor harassment.
Cons
- It’s a long-term commitment that requires you to repay most of your assets.
- The case may be dismissed if you fail to make a repayment.
- The legal and admin fees are higher than Chapter 7.
Common Scenarios: Which Option Fits Your Situation?
If you pass a means test and can exempt all or most of your assets, Chapter 7 is usually the best option. You won’t need to worry about mounting unsecured debts and can wipe the slate clean in just a few months.
However, if you have a steady income but lots of debt, Chapter 13 can help you restructure and repay those debts without worrying about losing your home. Generally, you will pay less than the full amount due, and you don’t need to worry about co-signers getting caught up in the financial melee, which is much more likely with Chapter 7 bankruptcy.
How Bankruptcy Affects Your Credit and Financial Future
Although bankruptcy will remain on your credit report for up to a decade, that doesn’t mean you’ll be refused credit in that time.
Your credit score will typically drop by 100 to 200 points—the higher it is to begin with, the more severe the drop will be. It’s detrimental, but not as much as you might think.
Debtors often get locked into cycles of late payments and high credit optimization before filing for bankruptcy. These cycles can steadily drag their score down over the years. Bankruptcy rips off that Band-Aid quickly, and while it will hurt more in the short term, the financial pain subsides quickly, and it’s usually a better outcome in the long run.
Next Steps: Choosing the Right Path Forward
If you’re thinking about filing for bankruptcy and aren’t sure what option is right for you or which of your assets will be exempt, contact an experienced bankruptcy attorney today.
Founded in 1989, County Law Center offers an experienced bankruptcy service led by Marc A. Duxbury. We’ve helped thousands of Californians in your position and can guide you through the process from filing to completion. Contact us now for more information—we don’t charge for the initial consultation.