Asset Treatment: Fundamental Differences
Chapter 7 and Chapter 13 take fundamentally different approaches to your property. In Chapter 7, a trustee reviews your assets and can liquidate (sell) anything that isn't protected by exemptions. In Chapter 13, you keep all your property but must pay creditors at least as much as they would have received in a Chapter 7 liquidation.
The practical difference is less dramatic than it sounds. About 95% of Chapter 7 cases are "no-asset" cases, meaning exemptions protect everything the debtor owns. The key is understanding your state's exemption laws before filing.
Your Home in Bankruptcy
In Chapter 7, your home equity is protected up to your state's homestead exemption amount. If your equity exceeds the exemption, the trustee could theoretically sell the home (though this is rare). If your equity is within the exemption, you keep the home -- but you must continue making mortgage payments.
In Chapter 13, you always keep your home. If you're behind on mortgage payments, you can cure the arrearage (catch up on missed payments) through your repayment plan while continuing current payments. This is one of Chapter 13's most powerful features.
Key difference: Chapter 13 lets you cure mortgage arrears over 3-5 years. Chapter 7 does not. If you're facing foreclosure, Chapter 13 may be the better choice.
Your Car in Bankruptcy
In Chapter 7, your car is protected up to your state's vehicle exemption. Most states exempt $2,500-$6,000 in vehicle equity. If your car is worth $10,000 but you owe $8,000, your equity is $2,000 -- well within most exemptions.
In Chapter 13, you keep your car and continue making payments through the plan. If your car loan is more than 910 days old (about 2.5 years), you may be able to "cram down" the loan to the car's current value, potentially saving thousands.
Retirement Accounts
Retirement accounts receive strong protection in both chapters. 401(k), 403(b), and most employer-sponsored plans are protected without limit under federal law (ERISA). Traditional and Roth IRAs are protected up to approximately $1.5 million (adjusted periodically for inflation).
This protection exists in both Chapter 7 and Chapter 13, so retirement accounts should rarely influence your chapter choice.
Bank Accounts and Cash
Cash and bank account balances are harder to protect. Most states have limited cash exemptions. In Chapter 7, the trustee can claim non-exempt cash. In Chapter 13, non-exempt cash increases your minimum plan payment.
Practical tip: time your filing strategically. Filing right before payday when your account is low can protect more cash. Your attorney should help you plan the optimal filing date.
The Liquidation Test in Chapter 13
Chapter 13 includes a "best interests of creditors" test: your plan must pay unsecured creditors at least as much as they would have received in a hypothetical Chapter 7 liquidation. If you have significant non-exempt assets, this increases your Chapter 13 payments.
This creates an important dynamic: the more assets you have, the more expensive Chapter 13 becomes. For asset-heavy filers, sometimes Chapter 7 (with strategic pre-filing planning) is actually the better option.
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Last updated: April 2026. Not legal advice.
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