Chapter 7 vs Chapter 13: Which One Do Veterans Need?

Neither one is the "good" bankruptcy

Chapter 7 and Chapter 13 are not the good bankruptcy and the bad bankruptcy. They are two different tools for two different problems.

The wrong question is "which one is better." The right question is "what am I trying to save?"

Here is the difference, in plain English, with the parts that matter specifically if you served.

Chapter 7 is the reset

Chapter 7 wipes out unsecured debt. Credit cards. Medical bills. Personal loans. Old repossession balances. Most collection judgments.

It is fast. From filing to discharge is usually a few months, not years.

The tradeoff is that a trustee can sell property that is not protected by an exemption. In practice, for most of the people I file for, that never happens, because Maryland's exemptions cover what they own. But it is a real question and it is the first thing I look at.

You have to qualify, and that is where the means test comes in.

Chapter 13 is the catch-up

Chapter 13 does not wipe the slate. It restructures.

You keep what you have and you pay back a piece of what you owe over three to five years, on a plan a judge approves. Your creditors have to accept it.

This is the chapter that saves a house from foreclosure, because it lets you cure the arrears over the life of the plan while you stay current going forward. It is the chapter that stops a repossession and lets you catch up on a car. It is the chapter that handles debts Chapter 7 will not touch, like most tax debt and domestic support arrears.

It is also the chapter you use when you do not qualify for Chapter 7, or when you have property you want to protect that Chapter 7 would put at risk.

The means test, and why veterans keep getting this wrong

The means test is the qualifying calculation for Chapter 7. It compares your income to the Maryland median for your household size.

Here is the part that costs veterans a filing they were entitled to:

Your VA disability compensation is not counted. The HAVEN Act of 2019 amended 11 U.S.C. § 101(10A) to exclude VA disability compensation from "current monthly income."

Veterans add their VA compensation to their household income, run the number themselves, decide they earn too much, and never call anybody. I have written about VA disability and the Chapter 7 means test in detail, and it is the single most common reason a veteran walks in believing something about their own case that is not true.

And some servicemembers skip the means test entirely. Under 11 U.S.C. § 707(b)(2)(D), qualifying disabled veterans and certain Guard and Reserve members are excluded from the means test altogether. Not "usually pass it." Excluded from it. The Guard and Reserve exclusion runs on a 540-day window that most people have never heard of.

So before you assume you are a Chapter 13 because the number looked bad, make sure somebody ran the number the right way.

What each one is actually for

Chapter 7 is probably your tool if: your debt is mostly unsecured, you are current on your house and car or you are willing to let them go, you pass the means test or you are excluded from it, and you want this over with.

Chapter 13 is probably your tool if: you are behind on a mortgage and want to keep the house, you are behind on a car and want to keep it, you have significant tax debt or support arrears, you have non-exempt property you want to protect, or your income is too high for Chapter 7.

Either one stops a garnishment. The automatic stay under 11 U.S.C. § 362 kicks in the moment you file and halts most collection activity, including wage garnishment and most collection lawsuits. If a garnishment is running right now, that is usually the most urgent fact in your case, because money already taken is much harder to recover than money not yet taken.

The thing that is not on either list

Sometimes the answer is neither.

If your only income is VA disability, if you have no wages to garnish, and if your bank account is protected, your creditors may have nothing to collect from. That is called being judgment proof, and it is a real position to be in. Section 5301 protects your VA compensation whether or not you ever file anything.

If you are carrying pre-service debt at a punishing rate, the SCRA 6 percent cap might fix the math without a bankruptcy at all.

I would rather tell you that in a free consult than file you into something you did not need.

Frequently asked questions

Is Chapter 7 better than Chapter 13? Neither is better. Chapter 7 discharges unsecured debt in a few months but a trustee may sell property that is not exempt. Chapter 13 restructures debt over three to five years and can stop a foreclosure or repossession while you catch up. The right chapter depends on what you are trying to protect.

How long does each take? A Chapter 7 case typically runs a few months from filing to discharge. A Chapter 13 plan runs three to five years, though the automatic stay protects you from the day you file.

Does VA disability count as income for the means test? No. The HAVEN Act of 2019 amended 11 U.S.C. § 101(10A) to exclude VA disability compensation from current monthly income. Many veterans assume they earn too much for Chapter 7 because they included it.

Can a veteran skip the means test? Some can. Under 11 U.S.C. § 707(b)(2)(D), qualifying disabled veterans and certain Guard and Reserve members are excluded from the means test entirely.

Will bankruptcy stop a wage garnishment? In most cases yes. Filing triggers the automatic stay under 11 U.S.C. § 362, which halts most collection activity including garnishment. Domestic support obligations are treated differently.

Which chapter saves my house? Chapter 13 is the tool for curing mortgage arrears, because it lets you pay the past-due amount over the life of the plan while staying current on the regular payment.

Do I have to be broke to file Chapter 7? No. The means test compares your income to the Maryland median for your household size, with adjustments. Plenty of working people qualify, and some veterans are excluded from the test entirely.

Related reading for veterans

Can I file Chapter 7 if I receive VA disability? — the HAVEN Act and the means test.

Can I file bankruptcy while active duty, Guard, or Reserve? — the 540-day window.

Can they garnish my VA disability? — 38 U.S.C. § 5301 and the bank account trap.

Will bankruptcy cost me my VA home loan? — what the VA Lender's Handbook says about entitlement.

Where Maryland veterans can get help with debt — the free options, with current numbers.

Talk to someone who knows this part of the law

Which chapter you are eligible for may surprise you. That is what a consult is for.

Sheereen E. McNair, Esq. · Middleton Legal · Greenbelt, Maryland. Call 240-896-3253. Free 15-minute consultation. You will talk to me.

We are a debt relief agency. We help people file for relief under the Bankruptcy Code.

This page is attorney advertising and general information about federal law. It is not legal advice for your situation, and reading it does not create an attorney-client relationship. Every case is different. Middleton Legal represents clients in Maryland.

Part of Middleton Legal's guide to Bankruptcy for Veterans and Military Families in Maryland.