Chapter 7 or Chapter 13? Which is right for you?

Written by Harold Jarnicki on . Posted in Uncategorized

Individuals who file for bankruptcy have two types of bankruptcy as options: Chapter 7 and Chapter 13. If you are considering bankruptcy, you may wonder which type would be best for you. The answer depends heavily on your situation.

Both types of bankruptcies are similar in the sense that both offer a discharge of many types of your debts-meaning that you no longer have to repay the debt. However, the two types are otherwise very different.

Fundamental Differences

The main difference between the two types of bankruptcies is how each one works. In Chapter 7, also called liquidation bankruptcy, your nonexempt property is sold to pay your debts. However, many people in financial distress do not own any nonexempt property, such as a vacation home, so most Chapter 7 filers do not lose any property. Once the sale (if there is property to sell) is completed, you receive a discharge of many types of your debts.

Conversely, in Chapter 13, your debts are consolidated into a payment plan and are paid back in full or partially in monthly installments over a period of three to five years. Once the plan has been completed, you receive a discharge of any remaining debt.

Treatment of Debt

One of the other main differences between the two types of bankruptcy is how your debt will be affected. Here are some examples:

  • Alimony, Student loans, and Child Support: Neither type of bankruptcy will discharge your obligation to pay domestic support debts like alimony or child support. Student loans can be discharged in either type of bankruptcy, but only in very rare and especially dire circumstances.
  • Mortgages and Car Loans: Chapter 13 bankruptcy allows you to stop foreclosure and keep your house or car, as long as you catch up with your missed payments through a repayment plan. Chapter 7 can temporarily stop foreclosure, but cannot cancel it, if you do not catch up with any arrearages.
  • Nonsupport Debts Owed Pursuant to a Property Settlement or Divorce: If your spouse objects to a discharge in Chapter 7, you will still owe the debt unless you can prove that you will be unable to pay the debt after bankruptcy. Chapter 13 discharges any remaining balance once bankruptcy has been completed.
  • Co-Debtors: Chapter 13 protects co-debtors against creditors’ attempt to collect the debt owed; Chapter 7 does not.

Eligibility

Chapter 13 bankruptcy is easier to qualify for than Chapter 7. As long as your secured debts (e.g. mortgages and car loans) are below $1,081,400 and your unsecured debts (e.g. credit card or medical bills) are under $360,445, you would likely qualify for Chapter 13.

In Chapter 7, on the other hand, you must first undergo a means test to prove that you do not have the financial means to pay your debt. This test requires you to provide information to the court concerning your income, property, and amount of debt owed. If it is determined that your disposable income is above a certain threshold, you would not qualify for Chapter 7 and must file Chapter 13 instead.

Determining the type of bankruptcy that would be right for you can be a complicated process. Therefore, it is wise to consult with an experienced bankruptcy attorney, who can recommend a debt relief option that will protect your best interests.