Chapter 7 vs Chapter 13
Debt can be extremely stressful. Chapter 7 and Chapter 13 bankruptcy can be confusing and complex. It's imperative that you understand the differences as the wrong choice may be disastrous.
So, my goal is to simplify the information for you. For example, we would like you to walk away with 3 key differences between the two options.
1. Cost
2. Duration
3. Credit
If you would like an estimate for your specific situation, feel free to take the Chapter 7 vs Chapter 13 calculator that is personalized to your finances and is based on the official bankruptcy forms. We have included an image of an example results page.
Chapter 7 and Chapter 13 Bankruptcy Overview
We speak with many individuals who were not happy about being in a Chapter 13 bankruptcy. Many felt that there was not a proper explanation of the differences. Many people we speak with may not have realized that:
- Many attorneys provide payments plans for a Chapter 7 bankruptcy.
- Chapter 13 bankruptcy is often much more expensive.
- You can often keep your house and vehicle when filing a Chapter 7 bankruptcy.
Thus, the purpose of the article and the goal of Ascend is to inform you about the differences between Chapter 7 and Chapter 13 bankruptcy to help you make the most informed decision with all of the information.
1) Chapter 7 vs Chapter 13 Calculator
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:
- Estimates Chapter 7 Qualification
- Provides estimated Chapter 13 plan payment
- Provides cost and fees estimates for Chapter 7 and Chapter 13
- Compares the pros and cons of Chapter 7 and Chapter 13
- Allows you to compare other alternative options such as debt management, debt settlement, and debt payoff planning
- Uses your zip code to provide specific information for your county and state
2) What is a Chapter 7 Bankruptcy
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.
You may be interested to estimate qualification through a Chapter 7 means test or you may also wish to understand more about the Chapter 7 bankruptcy process at this point.
3) What is a Chapter 13 Bankruptcy
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.
4) Pros and Cons of Chapter 7 Bankruptcy
There are several pros and cons of Chapter 7 bankruptcy that individuals should consider before filing under Chapter 7:
- Chapter 7 can be a quick way to get out of debt. Most no-asset Chapter 7 cases are discharged and closed in four to six months after filing.
- Debtors are not required to repay any portion of discharged unsecured debts.
- A debtor can get rid of secured debt by surrendering the collateral to the creditor. It does not matter if the property is worth less than is owed on the secured lien. The creditor cannot try to collect the remaining amount owed.
- The attorneys’ fees for filing a Chapter 7 case are typically about one-half the amount of a Chapter 13 case.
- The Chapter 7 trustee can sell a property that is not protected by bankruptcy exemptions.
- The Chapter 7 case does not help a person keep his car or home if he cannot afford the payments.
- Some debts are not discharged in bankruptcy, so the debtor stills owe those debts after the case is closed. Non-dischargeable debts include alimony, student loans, most tax debts, and child support.
We discuss the above issues in more detail in our Pros and Cons of Chapter 7 Bankruptcy article in our blog.
5) Pros and Cons of Chapter 13 Bankruptcy
Chapter 13 bankruptcy cases also have several pros and cons to consider. Some of the pros and cons of Chapter 13 bankruptcy cases include:
- Chapter 13 bankruptcy cases can stop foreclosures and repossessions. A debtor can repay past-due mortgage payments and include car payments in a Chapter 13 repayment plan.
- Attorneys’ fees are higher for Chapter 13 cases, but most attorneys include their fees or a portion of their fees in the Chapter 13 plan.
- Most debtors in Chapter 13 are committed to a 60-payment Chapter 13 plan.
- A debtor cannot sell assets or incur debt without court approval during the Chapter 13 plan.
- Old tax debts and past-due support payments can be included in a Chapter 13 plan.
- Filing Chapter 13 can protect assets that might be at risk of liquidation in Chapter 7. However, the Chapter 13 plan payment increases slightly because of the non-exempt equity in an asset.
6) Factors to Consider When Deciding Between A Chapter 7 and 13 Bankruptcy
There are numerous things you may want to consider when making the decision between a Chapter 17 and Chapter 13.
Income Requirements
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.
Equity in Assets and Property
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.
Repossessions and Foreclosures
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.
7) Alternatives to Bankruptcy
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 websites, 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.
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