You may be considering a Chapter 7 or Chapter 13 bankruptcy and wondering which one is better to file.
Both chapters of bankruptcy provide debt relief and stop creditor harassment. However, some very significant differences between the chapters of bankruptcy may be considered before you decide if Chapter 7 or Chapter 13 can help you get out of debt.
Many people make the wrong debt relief decision. The purpose of the article and the goal of Ascend is to inform you about the differences between a Chapter 7 and Chapter 13 bankruptcy to help you make the most informed decision with all of the information.
Here's what we will cover. You may want to jump around to what's most relevant to your situation as each situation is unique.
Bankruptcies filed under Chapter 7 of the Bankruptcy Code are liquidation bankruptcies. Any assets that are not protected by bankruptcy exemptions are used to repay the person’s unsecured debts. However, most Chapter 7 bankruptcy cases filed by individuals do not result in the loss of property. However, the risk of property loss exists whenever a person files a Chapter 7 case, especially if the person does not carefully review bankruptcy exemptions before filing the Chapter 7 case.
Chapter 7 bankruptcy cases are restricted to businesses, individuals whose debts are primarily business debts, and individuals who meet income requirements. You cannot qualify for a bankruptcy discharge (debt forgiveness) in Chapter 7 unless you meet the income requirements.
Chapter 7 income requirements do not apply to people who have debts that are mostly related to a business, such as co-signed business loans, sole proprietor debts, and personal guarantees for business debts. The income requirements do not apply to a business Chapter 7. When a business files Chapter 7, the business is closed and liquidated.
A Chapter 13 bankruptcy case gives debtors the ability to restructure their debts into a repayment plan. Chapter 13 is limited to individuals who have a steady income. Self-employed individuals and people who earn income from a business can file under Chapter 13. However, businesses cannot file Chapter 13. Chapter 11 is designed for businesses that need to restructure their debts through bankruptcy.
Most Chapter 13 plans are for a term of 60 months. However, if a debtor’s income is below the median income for their state, the debtor may propose a 36-month Chapter 13 plan. The amount of a Chapter 13 plan depends on numerous factors, including the person’s income, expenses, debts, and assets. In some cases, recent financial transactions can also impact the amount of a Chapter 13 plan.
If you do not qualify or you do not wish to do a Chapter 7 bankruptcy, you may want to estimate your Chapter 13 plan payment via a Chapter 13 calculator.
There are several pros and cons of Chapter 7 bankruptcy that individuals should consider before filing under Chapter 7:
Chapter 13 bankruptcy cases also have several pros and cons to consider. Some of the pros and cons of Chapter 13 bankruptcy cases include:
There are numerous things you may want to consider when making the decision between a Chapter 17 and Chapter 13.
Deciding between Chapter 7 and Chapter 13 bankruptcies can be challenging. One of the first factors to consider is your income. You must meet the income requirement for the Chapter 7 Means Test to receive a bankruptcy discharge in Chapter 7. You may be wondering how to pass the means test for Chapter 7.
If your median income is above your state’s median income and you have enough disposable income to pay a minimum amount to your unsecured creditors, you need to file under Chapter 13.
Bankruptcy exemptions only protect a certain amount of equity in your assets. If your assets are worth more than the allowed bankruptcy exemptions, you could lose that property in Chapter 7. However, you could keep your property in Chapter 13 by paying a slightly higher bankruptcy repayment plan.
If you are behind on your mortgage payments, Chapter 7 probably will not help. You would need to catch up on your mortgage payments, refinance the mortgage loan, or apply for a mortgage modification. However, Chapter 13 stops foreclosure by allowing you to catch up on the mortgage payments through your bankruptcy repayment plan.
Likewise, if you cannot afford your car payments, Chapter 7 may not help. The lender will want full payment of the past-due payments or payment of the loan in full. If the car is worth less than is owed on the car, you may be able to redeem the car (pay what the car is worth) to satisfy the debt, but you must pay the amount all at one time.
In a Chapter 13 case, you can spread out car payments over several years to lower the payment. In some cases, you can “cram down” the amount owed to pay off the car loan if the car is worth less than the loan payoff, and you owned the vehicle for at least 910 days before filing Chapter 13.
You may be wondering how to compare Chapter 7 vs Chapter 13 head to head based on your specific income and expenses. We built the Chapter 7 vs Chapter 13 calculator below that does the following:
Debt settlement, debt management, and debt consolidation are three alternatives to bankruptcy that work for many people. Without filing bankruptcy, you can get out of debt. In some cases, you can eliminate debts for less than you owe on the debt.
Ascend wants to help you explore all your bankruptcy alternatives in addition to bankruptcy. The links above throughout this article provide additional information about Chapter 13 and Chapter 7 bankruptcy cases. You can also explore bankruptcy alternatives by using viewing different in-depth articles on our website, such as our Debt Settlement Guide, and Debt Management vs. Debt Settlement.
Most people come to Ascend because they need to understand everything about the different main debt relief options. If you don't need debt relief but could use debt payoff planning, you may be interested to check out the Savvy Debt Payoff Planner. We built this tool to help folks who stated that they needed more help in eliminating their debt but may not need bankruptcy or another form of debt relief just yet.
You may have information overload, and I apologize if this is the case. Feel free to contact me directly or by calling 833-272-3631 to speak with one of our representatives. Ascend is able to offer insights for free. How do we make our money? We receive donations and a small referral fee from the different options when that option is right for you. There's no salespeople and no gimmicks. We found that aligning our incentives with you (debt freedom) then we can provide the best experience.