Is it better to file a Chapter 7 or 13 bankruptcy? If you’re in a situation where bankruptcy seems necessary, you must choose between Chapter 7 and Chapter 13 bankruptcy. These are different parts of the U.S. Bankruptcy Code that help people deal with overwhelming debt. The key question is whether you’ll follow a debt repayment plan while keeping your property or if you’ll need to sell some of your belongings to pay off what you owe. To make the right choice, you’ll need to do some research.
But before going further, it’s important to know that neither Chapter 7 nor Chapter 13 bankruptcy can erase certain debts, such as:
- Taxes or government fees
- Child support or alimony
- Student loans
- Auto loans
Chapter 7 Bankruptcy vs. Chapter 13 Bankruptcy
The main differences between Chapter 7 and Chapter 13 bankruptcy are about what happens to your stuff and who can qualify based on money.
In Chapter 7, you might have to sell things that aren’t protected to pay off your debts. But a survey from 2018 by the American Bankruptcy Institute found that if you fill out the right paperwork, 93% of people in the United States can keep all their stuff safe.
Chapter 7 bankruptcy usually clears your debts quickly, so you can move on with your life. On the other hand, Chapter 13 lets you keep your things but makes you follow a court-ordered payment plan, which can last three to five years.
Another Issue to Consider
Not everyone can choose Chapter 7 bankruptcy. To qualify, you need to pass a means test, which is a way to make sure that people with higher incomes can’t wipe out all their debts using this method. In Chapter 7, you should have an income below the average for your state or pass the means test, which looks at your income, expenses, and family size to figure out if you can reasonably repay your debts after taking care of essential expenses. If you don’t pass this test, you might use Chapter 13 instead.
Here’s a comparison chart of the two bankruptcy options. After the chart, we’ll explain how Chapter 7 and Chapter 13 bankruptcy work in more detail, helping you decide which one is better for your situation.
|Type of Bankruptcy||Liquidation||Reorganization|
|Who Can File?||Individuals and business entities||Individuals only (including sole proprietors)|
|Eligibility Restrictions||Disposable income must be low enough to pass the Chapter 7 means test||Cannot have more than $419,275 of unsecured debt or $1,257,850 of secured debt (as of 2021)|
|How long does it take to receive a discharge?||Typically three to five months||Upon completion of all plan payments (usually three to five years)|
|What happens to property in bankruptcy?||The trustee can sell all nonexempt property to pay creditors||Debtors keep all property but must pay unsecured creditors an amount equal to the value of nonexempt assets|
|Allows removing unsecured junior liens from real property through lien stripping?||No||Yes (if requirements are satisfied)|
|Allows reducing the principal loan balance on secured debts through a loan cramdown?||No||Yes (if requirements are satisfied)|
|Benefits||Allows debtors to quickly discharge most debts and get a fresh start||Allows debtors to keep their property and catch up on missed mortgage, car, and non-dischargeable priority debt payments|
How Chapter 7 Bankruptcy Works
When you file for Chapter 7 bankruptcy, there’s something called the automatic stay that stops most creditors from bothering you. This means they can’t keep calling you or taking money from your wages.
Chapter 7 bankruptcy can wipe out debts like medical bills, personal loans, and credit card balances in about three or four months. You don’t have to pay those creditors back. Instead, a bankruptcy trustee chosen by the court sells any property that can’t be protected by a bankruptcy exemption to help pay your creditors. Most things you have in your home, like clothes, furniture, retirement accounts, and up to certain limits, your house and car, are safe.
Chapter 7 bankruptcy works well for people with low income and not many assets. It’s for those who can’t commit to a three-year repayment plan and don’t have debts like alimony or child support, which can’t be erased in bankruptcy. Before you go for this, you should think about whether the debts you’d get rid of are worth more than the property you’d lose.
But, here’s the catch – you might not qualify. You’ll need to pass a Chapter 7 means test to show that you really can’t afford to pay your debts.
How Chapter 13 Bankruptcy Works
If you really want to keep your property, Chapter 13 bankruptcy gives you a chance. It’s your best choice if you have enough income.
Here’s some good news
When you file for Chapter 13, it can stop the process of foreclosure, which can help you catch up on overdue mortgage payments. Also, debt collectors can’t bother you during the bankruptcy.
Chapter 13 makes you come up with a plan to pay off all or part of your debts through a single monthly payment that goes to your creditors. This repayment process lasts for three to five years. How much you pay depends on your income, the types and amounts of debts you have, and the things you own.
Chapter 13 is good for people who are behind on alimony or child support payments, as it lets them catch up over three to five years. It’s also useful for those who need to catch up on house or car payments to keep those things.
In Chapter 13 bankruptcy, the court doesn’t sell your property, but you must pay creditors an amount equal to the value of property that’s not protected. The amount you pay depends on your income, expenses, and the kind of debt you owe.
You’ll have to pay 100% of the fees for filing bankruptcy, the commissions for the trustee, and the fees for your bankruptcy attorney. You’ll also need to pay 100% of overdue child and spousal support, most tax debts, wages, salaries, or commissions you owe to employees, and contributions owed to an employee benefit fund.
To keep your home, car, or other property with security, you must pay 100% of the amount you’re behind on, 100% of the debt secured by a tax lien, and stay current on monthly payments. How much you pay for your unsecured, less important debts depends on your income, how long your repayment plan is, and the value of property that’s not protected.
When Should I File for Chapter 7 or Chapter 13 Bankruptcy?
Some things are worth repeating: When it comes to bankruptcy, there are consequences, so think carefully about your options. If you can afford it, it’s a good idea to consult with an attorney. Bankruptcy can be costly, with court fees and attorney fees that can add up to thousands of dollars.
Between the two choices, Chapter 7 is more popular because it doesn’t require you to pay back a part of your debts. However, Chapter 13 might be a better option if you’re behind on your mortgage payments, as it allows you to keep your home and gives you time to catch up on what you owe. The same applies to debts like back taxes and spousal/child support, which won’t be erased in bankruptcy.
Things to Think About:
- What type of debt do you have? Is it secured, unsecured, dischargeable, or non-dischargeable?
- How much of your property can be sold to pay off debts (non-exempt assets)? Usually, non-exempt assets aren’t essential for your home, job, or daily life.
- Does your regular monthly income cover your living expenses?
- How important is it for you to clear the bankruptcy from your credit report quickly, which happens faster with Chapter 13?
When to Consider Filing Chapter 7 Bankruptcy
So, when is Chapter 7 the better option?
- If most of your debt is unsecured, like medical bills, credit cards, or personal loans.
- When your income doesn’t cover your basic living costs.
- If you can’t afford a bankruptcy lawyer.
- When you don’t have debts that won’t go away after bankruptcy (non-dischargeable debts).
- If you can’t commit to a repayment plan lasting at least three years.
When to Consider Filing Chapter 13 Bankruptcy
When is Chapter 13 right for you?
- If you earn too much to qualify for Chapter 7.
- If you have a property you want to protect.
- When you need to catch up on mortgage payments to keep your home.
- If you have debts that can’t be erased.
- If you have more than one mortgage.
- When you owe money to your ex-spouse from a property settlement.
Need Help Choosing? Get Professional Legal Assistance
Choosing the right path in bankruptcy can have a big impact on your financial future. If you’re unsure about whether Chapter 7 or Chapter 13 is the best choice for you, it’s essential to seek professional help.
Bruner Wright, a trusted name in bankruptcy services in Jacksonville, FL, is here to assist. With their expertise, they can provide the advice and support you need to navigate the complex world of bankruptcy.
Reach out to Bruner Wright today to make the best decision for your financial well-being.
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