Have you decided that filing for bankruptcy is your best option to erase debts you cannot pay? If so, you must decide whether to file for Chapter 7 or Chapter 13 bankruptcy.
While you may want to file under Chapter 7, you may not be eligible for a Chapter 7 bankruptcy discharge. Likewise, you may prefer a Chapter 13 bankruptcy to protect property from being sold off; however, you may not have the steady income needed to fund a Chapter 13 repayment plan.
There are several things to consider before choosing which chapter of bankruptcy to file. Let’s discuss a few of the most important things to consider when choosing between Chapter 7 and Chapter 13.
Do You Qualify to File Under Chapter 7 or Chapter 13?
The goal of filing for bankruptcy is to obtain a discharge. The discharge waives your legal liability to repay a debt. Certain debts cannot be discharged in bankruptcy; however, most unsecured debts are eligible for a discharge. The Department of Justice’s Bankruptcy Information Sheet discusses bankruptcy discharges in greater detail.
Qualifying to File Under Chapter 7
Chapter 7 bankruptcy relief is available for individuals who cannot afford to repay their debts. You must meet certain income requirements to qualify for a bankruptcy discharge in Chapter 7. The court uses a form called the Means Test to determine whether a person is eligible for a discharge under Chapter 7. You can use our bankruptcy means test calculator to estimate your qualification within your state. Or, obtain a rough estimate below:
The Means Test
The Means Test compares your average income to the average income of households of the same size in your state. If your average income exceeds the median income for your state, you may not qualify for Chapter 7. However, some people may still qualify for Chapter 7, even though their income exceeds the median income level for their state.
The Means Test also measures your disposable income. Your disposable income is your remaining money at the end of each month after you pay for certain living expenses. If your disposable income is below a certain level, you could still qualify to file under Chapter 7.
Qualifying to File Under Chapter 13
A Chapter 13 bankruptcy case, often referred to as a “wage earners” bankruptcy, requires you to earn sufficient income to fund a Chapter 13 plan. The Chapter 13 plan is a court-approved reorganization plan. You reorganize your debts into an affordable monthly repayment plan. Most debtors who file under Chapter 13 must enter into a 60-month bankruptcy plan. However, a few debtors qualify for 36-month Chapter 13 plans. You can estimate your monthly payment using our Chapter 13 calculator below:
To be successful in a Chapter 13, you need a steady income sufficient to pay your Chapter 13 payments, living expenses, and any debts not included in your Chapter 13 plan. Debts outside of Chapter 13 plans may include your regular mortgage payments and ongoing domestic support obligations (alimony and child support).
You may earn your income through wages, salaries, commissions, and self-employment income. You may also qualify to file under Chapter 13 if you receive your income as a retirement, pension, disability, or Social Security benefit. The crucial question is whether the income is steady and sufficient to fund the plan and pay your living expenses.
Are You In Danger of Losing Assets if You File Chapter 7?
When you file a Chapter 7 bankruptcy case, all your assets become part of your bankruptcy estate. A Chapter 7 trustee reviews your assets to identify assets that may be sold to repay your unsecured creditors. An asset that has equity above valid liens and bankruptcy exemptions could be at risk of being sold in Chapter 7.
Bankruptcy exemptions protect some of the equity in your assets. The exemption is the amount of equity you are entitled to keep if the property were to be sold by the Chapter 7 trustee. The trustee analyzes your property to determine whether there is money left over from the bankruptcy estate after satisfying the liens owed on the property and the costs of sale, and giving you the exemption amount you are entitled to receive. If there is little to no money remaining in the bankruptcy estate, the trustee abandons the property (you get to keep it).
There are federal bankruptcy exemptions and state bankruptcy exemptions. The state in which you reside determines whether you must use federal exemptions or state exemptions. State bankruptcy exemptions vary.
Before filing Chapter 7, it is important to review the bankruptcy exemptions available in your state to assess your risk of losing property if you file under Chapter 7. If your assets are in danger in Chapter 7, you might want to consider filing Chapter 13. In Chapter 13, you can protect assets with equity above the allowed exemptions by paying a little extra each month through your repayment plan.
NOLO lists those states that allow for federal bankruptcy exemptions. However, bankruptcy exemptions can change. Therefore, you must make sure you review the most current information available for your state regarding bankruptcy exemptions before choosing between Chapter 7 and Chapter 13.
Pros and Cons of Filing Under Chapter 7 versus Chapter 13
Chapter 7 Pros / Chapter 13 Cons
- Chapter 7 is generally faster. Most no-asset Chapter 7 cases are completed within four to six months of filing the bankruptcy petition. A Chapter 13 case typically takes over five years to complete.
- It is typically less expensive to file for Chapter 7. The attorneys’ fees and filing fees for Chapter 7 are usually less than the fees for filing under Chapter 13.
- In a Chapter 7 case, you do not repay unsecured debts that are eligible for a discharge. Under Chapter 13, you must pay a certain percentage of your unsecured debt. The amount paid depends on several factors, including your disposable income, the amount of debt owed, and the value of non-exempt property.
Chapter 7 Cons / Chapter 13 Pros
- You may lose property under Chapter 7. If you have large amounts of equity in your home, vehicles, and other property, bankruptcy exemptions may not protect that equity. However, filing under Chapter 13 can protect assets that have non-exempt equity. You may protect those assets from the court and your creditors in Chapter 13.
- A Chapter 7 bankruptcy case remains on your credit report for ten years, but a Chapter 13 bankruptcy case falls off your credit report after just seven years.
- You may qualify for a home mortgage quicker if you file under Chapter 13 instead of filing under Chapter 7.
- Filing Chapter 7 typically does not save your home or car if you are behind on your loan payments. Through a Chapter 13 case, you can catch up on mortgage payments to prevent foreclosure and pay your car loan through your bankruptcy plan.
- Chapter 7 does not help you with back alimony and child support payments. A Chapter 13 repayment plan can include domestic support arrears, provided you make all future alimony and child support payments on time.
- A Chapter 7 case does not get rid of most tax debt. The taxing authority may resume collection efforts after the Chapter 7 case closes, including wage garnishments and levies. Tax debt can be included in a Chapter 13 plan.
Are You Ready to Compare Chapter 7 and Chapter 13 in More Detail?
Ascend lets you compare your options for getting out of debt, including comparing Chapter 7 to Chapter 13. Let’s comparer your options to see if you qualify for Chapter 7, or if Chapter 13 might be better for your situation.