Deciding between Chapter 7 and Chapter 13 Bankruptcy

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Many individuals who file bankruptcy file under the specific chapter that they qualify for. If they are not eligible for one filing, they explore the other. However, some people fall into multiple eligibilities and determine which bankruptcy filing will better suit their needs.

Chapter 7 Process

Chapter 7 bankruptcy is a liquidation bankruptcy. Its main benefit is being able to eliminate unsecured debts like credit card debt and medical bills. During a Chapter 7 filing, a bankruptcy trustee is appointed to administer the case, including acquiring and selling the debtor’s property that is not exempt. The funds from these sales are then sent to creditors.

Eligibility Requirements

Chapter 7 corresponds with the potential to eliminate the most unsecured debt. As such, there are greater restrictions on this type of filing. Many individuals who have high incomes that exceed the median income for a family of the same size in the same state may not be permitted to file under Chapter 7. The test is whether the filer will have enough disposable income after providing for certain expenses and required debt payments to pay back a portion of unsecured debt over a repayment plan of five years.

Generally, only individuals with little or no disposable income only qualify for this type of bankruptcy. If a person earns too much income, he or she may only qualify for a Chapter 13 bankruptcy. Both individuals and businesses can file Chapter 7 bankruptcy.

Chapter 13 Process

Chapter 13 bankruptcy is a reorganization bankruptcy in which the debtor restructures debt repayment and enters into an official repayment plan that is usually between three and five years in duration. The debtor retains his or her property including assets that would not be exempt under a Chapter 7 filing. The debtor makes monthly payments during the plan and the remaining unsecured debt is discharged at the end of the repayment plan period.

Eligibility Requirements

A person cannot qualify for Chapter 13 bankruptcy if he or she has secured debts in excess of $1,149,525 and unsecured debts in excess of $383,175 at the time of publication. Only individuals and not business entities can file for Chapter 7 bankruptcy.

Specific Considerations

If an individual meets eligibility requirements under both filings, he or she may have specific considerations to choose one option over the other. Some considerations include:

Retention of Property

One key interest may be in retaining property. Under Chapter 13, individuals do not have to forfeit their assets since they are repaying the debt. Under Chapter 7 bankruptcy, debtors have their assets liquidated to pay off as much debt as possible.

However, some types of property are exempted under state and federal law. In some cases, an individual may lose his or her home if the equity exceeds the exemption amount. However, under Chapter 13, individuals may be able to incorporate these missed payments into their repayment plan. Additionally, Chapter 13 bankruptcy allows debtors to get rid of junior liens on property.

Type of Debt

Under Chapter 7 bankruptcy, debtors may be able to eliminate unsecured debt, but they may have to forfeit property to get rid of unsecured debt. However, they usually cannot eliminate certain debts like tax debt, spousal support or child support. Chapter 13 filers may be able to get rid of some tax debt. While they usually cannot eliminate spousal or child support obligations, they may be able to catch up on these payments over time with a Chapter 13 filing. Additionally, Chapter 13 filing allows debtors to reduce the principal loan balance on secured debts so that the overall amount of debt to repay is reduced.

Other Considerations

In order to determine the right type of bankruptcy to file, an individual should consider his or her assets, income, debt and financial goals. Additionally, they may wish to consider how long the process will take, with Chapter 7 often being wrapped up in a matter of months while a Chapter 13 case takes years to complete. A bankruptcy lawyer can explain the benefits and drawbacks to each option. He or she can evaluate whether the debtor meets the means test for a Chapter 7 bankruptcy or whether Chapter 13 is the only option. A bankruptcy lawyer can also explain the rules related to bankruptcy and make recommendations based on the client’s particular circumstances.


Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.

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