Chapter 7 Or Chapter 13: Which One Is Best For You?
November 3, 2022
When you have to file a Bankruptcy, the first question is which one is right for you.
The following table lists some of the major differences. But remember, it is best to consult with an experienced law firm that concentrates in Consumer Bankruptcy. Hopefully, you will think of calling Robert J. Adams & Associates.
Simple Description
Chapter 7: To get a quick discharge of lots of debts with possible surrender or sale of assets when they are owned outright.
Chapter 13: A payment plan to pay certain debts in full and a reduced portion of the remaining debts (perhaps 10%).
Minimum Income requirements
Chapter 7: None
Chapter 13: Must have income sufficient to fund a payment plan and still have enough to pay all monthly expenses.
Income: Means Test
Chapter 7: Lower income people are unaffected. Certain high income individuals may not be allowed do a Chapter 7 and are forced into Chapter 13 or have their case dismissed
Chapter 13: Certain higher income individuals must do 5 years payment plans. After taking multiple factors into account, the Means Test determines how much must be paid to creditors.
Credit Counseling
There are no differences between chapters. You must obtain credit counseling before filing. Lawyers can direct you to low cost approved counselors. This must be done less than 180 days before filing.
Debt limits
Chapter 7: None. Can be $1 or it can $1,000,000 as long as income does not allow payment of your debt.
Chapter 13: Debts cannot exceed a) $1,081,400 of secured debts nor b) $360,475 in unsecured and priority debts.
First steps on the case
Chapter 7: A trustee is appointed to the case. The trustee’s job is to see if any assets can be sold to raise money for your creditors.
Chapter 13: A plan is put together which generally lasts between 3 to 5 years and sets out the monthly payment. The plan must pay 100% of secured creditors (for assets you wish to keep) and priority debts (IRS for example). Then a smaller dividend can be paid to other creditors, maybe 10%.
How often can you file
This question is complicated. If you had a prior Chapter 7, you must wait 8 years. You can always file a Chapter 13, but you may not get a discharge if your last discharge was recent. A clear outline for both 7 and 13 can be found here.
Who do you owe after a discharge?
Chapter 7: Most debts are wiped out. But you will still owe student loans, parking tickets, child support, and recent IRS debt. Also, your mortgage if you want to keep your house and certain secured debts that are reaffirmed like a car note.
Chapter 13: With few exceptions, all debts will be wiped out upon obtaining a discharge. Exceptions: student loans, balance on a mortgage if you are keeping your house; continued child support payments.
My house or condo
Chapter 7: If you do not have arrears on your mortgage you can keep your home if you keep paying the monthly mortgage. Assets, can, however be sold by the trustee if they are high value and not exempt.
Chapter 13: Upon discharge you will keep your home by paying your monthly mortgage.
My car or truck
Chapter 7: If you are current on payments you will keep your vehicle by reaffirming the debt. If you are behind and want keep your car or truck, Chapter 13 is best.
Chapter 13: Generally car debts are paid through the plan. Upon completion you get the title to your vehicle.
Student loans
Chapter 7: Congress has decided that Americans who are trying to get ahead through education cannot discharge student loan. There are very few exceptions.
Chapter 13: Student loans normally survive the Chapter 13. Also, even though you don’t have to pay student loans during the Chapter 13, interest will pile up. If possible some clients treat student loans as a long term debt and maintain monthly payments.
Second mortgages
Chapter 7: If you are keeping your house you have to continue paying your 2nd mortgage.
Chapter 13: Sometimes 2nd mortgages can be eliminated depending on the value of the home and balances of the 1st mortgage.
Exemptions
Same for both chapters. Explanation can be found on our website:
a) Homes
Whether you want to do Chapter 7 or Chapter 13, you should have an experienced lawyer on your side to avoid errors and complications. Everyone at Robert J. Adams & Associates has over 20 years experience handling bankruptcies. Our consultations are Complimentary so why not call us?