Have you decided that filing bankruptcy is the best way for you to get rid of debts you cannot pay? If so, you must now decide whether it is better to file a Chapter 7 or Chapter 13 bankruptcy case.
While you may want to file under Chapter 7, you might not be eligible for a bankruptcy discharge in Chapter 7. Likewise, you may prefer to file a Chapter 13 bankruptcy case because you want to protect a certain piece of property from being sold by a Chapter 7 trustee, but you may not have a steady income to fund a Chapter 13 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 Chapter 7 or Chapter 13?
The goal of filing a bankruptcy case is to obtain a discharge. The discharge eliminates your legal liability to repay a debt. There are a few types of debts that cannot be discharged in bankruptcy, but 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 if a person can obtain a discharge under Chapter 7. You can take our bankruptcy means test calculator to estimate qualification below for your state. The rougher estimate is below:
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 the money left over each month after paying 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 is often referred to as a “wage earners” bankruptcy because you must 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 a 60-month bankruptcy plan. However, a few debtors qualify for a 36-month Chapter 13 plan. You can check your estimated monthly payment using our Chapter 13 calculator below:
To be successful in a Chapter 13, you may need to have a steady income sufficient to pay your Chapter 13 payments, living expenses, and any debts that are not included in your Chapter 13 plan, such as 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 determine if any assets may be sold to repay your unsecured creditors. An asset that has equity above any 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 if there would be any money left over for the bankruptcy estate once he paid any liens owed on the property, paid the costs of sale, and gave you the exemption amount you are entitled to receive. If there is little to no money left over for 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 has a list of states that allow federal bankruptcy exemptions. 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 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.
- 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.
- 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.
- 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 to get 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 a Chapter 13 case might be better for your situation.