Chapter 7 vs Chapter 13: Which Bankruptcy is Better For You?
If you’re struggling with debt, bankruptcy protection may be a great option for you. Even if you do just basic research, you’ll probably quickly be pointed to chapter 7 vs chapter 13 bankruptcy. Chapter 7 and Chapter 13 are two common but different types of bankruptcy that many individuals use for personal bankruptcy. When it comes to chapter 7 vs chapter 13, one of the most fundamental differences between these two chapters is that Chapter 13 is based on a repayment plan, while Chapter 7 liquidates your property and possessions to pay your debts.
If you’ve been thinking about filing bankruptcy, then you’ve probably come across the different forms of consumer bankruptcy. The more popular chapters under which personal bankruptcy gets filed are chapter 7 (liquidation bankruptcy), chapter 13 (adjustment of debts), and chapter 11 (reorganization bankruptcy). Before we get to the differences between chapter 7 vs chapter 13, there are some similarities across bankruptcy.
First, any consumer bankruptcy case gets started by filing a bankruptcy petition in the appropriate court. Similarly, you must pay a filing fee for any type of bankruptcy case.
Next, in all personal bankruptcy cases, the debtor will have to complete a credit counseling course and a debtor education – financial management course. (The credit counseling course is the first course, and the certificate of completion must be part of your initial bankruptcy filing. You can apply for an exemption in some circumstances where there is an undue hardship. The debtor education course is the second course, and the certificate must be filed before the bankruptcy discharge order is entered in your case.)
What are some differences between Chapter 7 vs Chapter 13 types of bankruptcy?
Chapter 7 bankruptcy and Chapter 13 bankruptcy are two different types of bankruptcy that most individuals use for personal bankruptcies. While the goal of any bankruptcy is the discharge of debt, how a debtor gets there differs from chapter to chapter. While both kinds of cases are heard in the same bankruptcy court, one of the most fundamental differences between these two chapters is that Chapter 13 is based on a repayment plan that lasts for 3 or 5 years, and generally allows you to keep your property, while Chapter 7 liquidates your nonexempt property to pay your debts.
In general, Chapter 7 is liquidation bankruptcy, and the idea is that any nonexempt property you have gets liquidated to pay off debts to the unsecured creditor. It can be a very good debt relief tool for people with little to no valuable assets, since often times most of the property they may own is protected under bankruptcy exemption laws. Chapter 7 is ideal for people looking for bankruptcy relief, especially if you make less than your state’s median income for your household. Additionally, chapter 7 bankruptcy is a very quick process, with the chapter 7 discharge often entered in just about 4 months.
Unlike Chapter 7 bankruptcy, Chapter 13 bankruptcy requires debtors to make a monthly payment under a court-approved repayment plan to pay off their debts over a period of either 3 or 5 years. A Chapter 13 payment plan is often used by people who either have income above your state’s median income, or they have nonexempt assets they want to keep, such as a home, cars, cash, and other assets.
In general, the chapter 7 discharge is quicker, easier and cheaper than Chapter 13 bankruptcy, while chapter 13 bankruptcy is more flexible and allows people to remain with their property.
Why is Chapter 7 better than 13?
If you qualify, Chapter 7 bankruptcy may often be the best option for people who cannot keep up with their debts and need a financial fresh start. It allows individuals to get rid of most types of unsecured debt, including medical bills, credit card bills, and personal loans. Likewise, it also discharges an individual debtor’s liability under most types of secured debt, including car loans, mortgage loans, and home equity loans. A Chapter 7 bankruptcy is known as a liquidation bankruptcy, because it allows you to keep exempt property (property you can keep under the law), and any nonexempt property gets liquidated by the bankruptcy trustee to pay off creditors.
For many people, it is often quicker, easier and cheaper to get a chapter 7 discharge of debts than a bankruptcy discharge under Chapter 13, which is why many people prefer it.
Why is Chapter 13 better than 7?
Chapter 13 is bankruptcy for individuals with a regular income. The premise of Chapter 13 is that it allows you to pay back creditors pursuant to a court-approved repayment plan over a three or five year period. Whereas under Chapter 7, you would not be able to keep certain assets if they are nonexempt, under Chapter 13, your repayment plan is based not only on the value of nonexempt property, but also on what your monthly income looks like. Chapter 13 bankruptcy can help you get back on your financial feet, while keeping your property and allowing you to pay back some portion your debts under the court-approved chapter 13 payment plan.
Also, the filing fee for a chapter 13 case is less than the filing fee for a chapter 7 case. At the time of this writing, the filing fee for a chapter 7 personal bankruptcy is $338, while the filing fee to file for bankruptcy relief under chapter 13 is $313.
Is filing Chapter 13 worth it?
Chapter 13 bankruptcy isn’t for everyone, but if you have income or assets that prevent you from filing chapter 7, filing for chapter 13 bankruptcy can be a great option for debt relief, so let’s talk a bit about why.
For many people, filing for chapter 13 is certainly worth consideration. Firstly, unlike in a chapter 7 case, a debtor has a right to voluntarily dismiss a chapter 13 bankruptcy. So if you file a case to give yourself breathing room, and then figure out an alternative option to manage your debt, you can generally move to dismiss your case.
Another reason why filing Chapter 13 bankruptcy may be worth it for debt relief is that you remain under the protection of the bankruptcy court. If you’ve been sued, or you’re dealing with a wage garnishment, then having the protection of the bankruptcy court may be really important to help you deal with unscrupulous creditors, whether it’s an unsecured creditor trying to enforce a claim when they ought not, or a secured creditor going after property without getting permission from the court. Bankruptcy protection is powerful, and in some cases, the court may enter an award for damages against a creditor that violates bankruptcy law.
Finally, for people that have assets that they cannot exempt in a chapter 7, a chapter 13 case may be the best of all available alternatives. For example, if you owe $50,000 in credit card debts, that debt is likely accruing interest at 20% or more. In a chapter 13 case, claims are taken as of the date filed, and you can propose a plan that pays 0% interest to the general unsecured creditor. While not perfect, a chapter 13 case may save you hundreds or even thousands of dollars over time. These are just a few reasons why, even if you don’t qualify for a chapter 7 bankruptcy, filing chapter 13 bankruptcy may be worth it.
Is Filing Chapter 13 a bad idea?
While filing chapter 13 bankruptcy can be really helpful to people, it’s not without its drawbacks. First, a Chapter 13 bankruptcy requires that you propose a repayment plan of some kind. Many people can’t grasp that conceptually – that they are filing for bankruptcy, yet they have to repay creditors. Chapter 13 bankruptcy was designed to help people keep their property, but also allow creditors to recover some portion of their debt since they cannot enforce their rights against the property of the debtor.
Another reasons why some people may feel like chapter 13 bankruptcy is a bad idea is because of increased costs. Simply, it costs more to file and be in a chapter 13 case than it does a chapter 7 case. There is more work involved, more court appearances, more monitoring of a case, and as a result, more fees.
One more reason why some people may feel like chapter 13 is a bad idea is because of the length of the case. While it’s a benefit to have the protection of the bankruptcy court for 3 or 5 years, it means that you have to be involved with the bankruptcy proceeding for 3 or 5 years, whereas a chapter 7 case can often be open and closed within 4 months. Often, you can only start to improve your credit score after your case is over, since creditors will often refrain from reporting any accounts on your credit report during a chapter 13 bankruptcy case. The length of time that a person is involved in a chapter 13 case can feel like a really long time, and thus why some people believe it’s a bad idea.
Can people without regular income file for chapter 13?
Unfortunately, chapter 13 bankruptcy is a type of bankruptcy available only to people who have a regular income and can make monthly payments of some of their disposable income towards unsecured debt over a period of time pursuant to a court-approved repayment plan. Literally the official title of chapter 13 cases is Adjustment of Debts of an Individual with Regular Income. Even further, the term “individual with regular income” is defined in the bankruptcy law in 11 U. S. C. Sec. 101(30):
(30) The term “individual with regular income” means individual whose income is sufficiently stable and regular to enable such individual to make payments under a plan under chapter 13 of this title, other than a stockbroker or a commodity broker.
Thus, chapter 13 bankruptcy is not available to everyone, since having regular income and being able to pay back some of your debt are requirements for filing for Chapter 13 bankruptcy. If you run a business as a sole proprietorship, this would qualify as regular income.
How much debt must you have to file Chapter 7?
As much as we would like to live debt free, most of us don’t have the money to pay our bills in full each month. If you’re thinking about filing bankruptcy, a question I often get is how much debt must I have to file bankruptcy?
Under any scenario, there is no minimum amount of debt you must have to file bankruptcy, regardless of the chapter. While other circumstances come into play (like your assets and income), you can file bankruptcy with just $1,000 in debt, or $100,000 in debt.
Keep in mind, however, that there are no debt limits in chapter 7 bankruptcy. So the amount of debt you have in chapter 7 has no cap. Things are a little different with chapter 13 bankruptcy, since there are limits to the amount of secured and unsecured debt a debtor may have.
Are the debt limits as eligibility requirements to file chapter 13?
The Bankruptcy Code has rules that determine if a debtor is eligible to file Chapter 13. The requirements for eligibility are found in 11 U. S. C. Sec. 109. In addition to the requirement that a person filing chapter 13 bankruptcy have regular income, as previously discussed, the bankruptcy laws also have a requirement that a debtor cannot have more than a certain amount of debts in a chapter 13 bankruptcy. There are limits on both unsecured and secured debt total. A debtor must meet both limits to qualify for bankruptcy protection under chapter 13.
Thus, since the Bankruptcy Code has debt limits for individuals, it is possible for someone to have too much debt to file for Chapter 13 bankruptcy. Even if someone has unsecured debt under the limit, if they secured debts they have is over the limit, they may not be a debtor under chapter 13.
Are there property limits for debtors filing under bankruptcy chapter 7 vs chapter 13?
While there are no property limits for debtors filing under either form of bankruptcy, chapter 7 vs chapter 13, the reality is that your case depends on property you may exempt. As discussed previously, in a chapter 7 bankruptcy, you can keep exempt personal property in bankruptcy. Property that you cannot protect with bankruptcy exemptions may be taken and liquidated by the bankruptcy trustee for the benefit of unsecured creditors.
Similarly, under chapter 13, there are no property limits. The same rules concerning bankruptcy exemptions exist. If you have nonexempt property, you can expect to pay the dollar value of that nonexempt property in your chapter 13 repayment plan.
What exemption laws are available to bankruptcy filers under chapter 7 vs chapter 13?
When people think about filing consumer bankruptcy, one of the most important things that comes to mind is whether, when they file for bankruptcy relief, that they will lose their property. As previously discussed, the property a debtor gets to keep (as well as what a chapter 13 bankruptcy repayment plan may look like) depends on the bankruptcy exemptions you have available to you.
Bankruptcy exemptions are simply laws that either say certain property never enters the bankruptcy estate, or that such property is exempt from enforcement of a judgment by creditors. There are both federal bankruptcy exemptions and state law exemptions. Which set of exemptions you are allowed to use depends on what state you’re in, since states differ on which bankruptcy laws apply.
For example, let’s see how the exemptions apply here in New York. Let’s say a homeowner has decided to file bankruptcy because they fell behind on their current mortgage payments, and as a result there are significant mortgage arrears, and foreclosure proceedings have begun. New York is a state that allows a debtor to choose between the federal exemptions and state exemptions (though you cannot mix and match).
The homeowner-debtor wants to try and keep their house, so very important to them before deciding to file a bankruptcy petition will be the homestead exemption. Under the federal bankruptcy exemptions, a debtor may exempt just over $25,000 (at the time of this article being written) for their homestead. Under the New York exemption, a debtor in New York City can exempt up to $170,000 (at the time of this article being written). As you may be able to see, understanding the bankruptcy exemption laws available to the debtor is critical to figuring out how to get the most protection in bankruptcy.
Does a chapter 13 repayment plan have to repay all creditors?
In the case of people who’ve filed for protection of bankruptcy under chapter 13, they may be required to repay a portion of their consumer debt, or all of it. The amount of outstanding debt they will have to pay depends on their circumstances, including their income, their expenses, and any nonexempt property they may have.
The Bankruptcy Code identifies different classes of unsecured debts. Particularly, there is nondischargeable debt (found in Section 523 of the Bankruptcy Code), and general debt. Under nondischargeable debt, there is nondischargeable priority debt and nondischargeable nonpriority debt. (Priority debts are identified in Section 507 of the Bankruptcy Code.)
In a chapter 13 bankruptcy, your proposed plan that is administered by the chapter 13 trustee has to address all debts, and treat similar classes of debts similarly. For instance, all general, nonpriority unsecured debt must be treated the same. This means how you may be paying credit card debt in your chapter 13 plan must be the same way you are paying student loans and medical debt – since they are all general, nonpriority unsecured debts.
What are the differences between the bankruptcy trustee in chapter 7 vs chapter 13?
The court-appointed bankruptcy trustee is a very important person in the bankruptcy process, irrespective of the chapter. What exactly does the bankruptcy trustee do, however? Generally, the role of the bankruptcy trustee is to represent the interests of unsecured creditors, and to ensure that unsecured creditors are being paid what they ought to be paid under bankruptcy law. The bankruptcy trustee’s role differs slightly, however, in chapter 7 vs chapter 13.
In a chapter 7 case, the bankruptcy trustee is in charge of liquidating the assets and distributing them to creditors. In other words, they are looking to make sure that any nonexempt property you may have is being liquidated to then pay unsecured creditors. Additionally, they safeguard the bankruptcy process by looking for any evidence of fraud or other indicators that a debtor may not be eligible for a discharge under chapter 7.
In Chapter 13 cases, the chapter 13 trustee is in charge of ensuring that your proposed repayment plan conforms to the bankruptcy laws, confirms that your repayment plan treats different classes of creditors properly under the bankruptcy laws, and administers the plan to ensure you remain in compliance with its terms, including timely payments. To get your chapter 13 repayment plan confirmed by the court, you will need to cooperate with the office of the chapter 13 trustee, including providing copies of any and all requested documents.
Can I get rid of my credit card debts if I file chapter 7 vs chapter 13?
Let’s say you have $10,000 in credit card debt. And you’re having a hard time managing payments to your credit cards. What should you do? Do you file for chapter 7 bankruptcy or chapter 13 bankruptcy?
Ultimately, and as mentioned previously, you may get a discharge of debts under both chapters of bankruptcy. The decision between which bankruptcy chapter to file under can be a tough one, and that decision is determined by your financial circumstances, including your income, your expenses, and any assets you may have. Especially if you have nonexempt property, you have to decide whether filing a chapter 7 vs chapter 13 bankruptcy makes sense for you. Both will help you get rid of many of your debts, but as described previously, how you get there under each chapter is different.
Generally, in chapter 7, you will receive a discharge of debts pretty quickly, about 4 months after you filed your bankruptcy petition. If all your property is protected under bankruptcy exemptions, then presumably all of your credit card debt will be discharged in your case without you having to pay anything or lose any property.
In a chapter 13 case, you will receive a discharge of debts only after successful completion of your chapter 13 plan, which is either 3 or 5 years. Since chapter 13 requires a repayment plan of some kind, you will pay at least some money in chapter 13 cases.
Can I keep my car in Chapter 7 vs Chapter 13?
In short, you may potentially keep a car in both chapter 7 and chapter 13 cases. In chapter 7, you first have to determine whether there is any nonexempt equity. For a leased vehicle, you will have t assume or reject the lease. For a financed vehicle, you may have to select between surrendering the car, redeeming the car, or entering a reaffirmation agreement. If you are keeping a car your are leasing or financing, you must continue to make your monthly payments on time.
In chapter 13, generally the same rules will apply. If you own a car outright, you will have to determine whether there is any nonexempt equity. If you are leasing a vehicle, you will have to declare whether you are assuming the lease or rejecting it in your plan. If you are financing a vehicle, you will have to declare how you are paying the car note in your plan.
Can you keep your house in Chapter 7 vs Chapter 13?
Your house is your castle, so when you file for bankruptcy, you’re going to want to protect your home. That’s why many homeowners wonder what happens if they file for Chapter 7 bankruptcy instead of Chapter 13 bankruptcy.
You may be able to keep your house in either chapter 7 or chapter 13. In chapter 7 cases, you may keep your house without having to pay any money if there is no nonexempt equity available.
In chapter 13 cases, you will have to declare how you are paying the mortgage, including any arrears, in your chapter 13 plan.
Is there a chance I can get rid of mortgage liens against my house in chapter 13?
In the Chapter 13 bankruptcy process, the debtor proposes a repayment plan to pay back some percentage to unsecured creditors, while secured creditors generally maintain their rights. Chapter 13 bankruptcy, however, offers some advantages that may not exist in a chapter 7 bankruptcy case.
One of the biggest advantages of a chapter 13 case is that you may be able to get rid of a mortgage lien against your house! This is commonly known as lien avoidance or lien stripping. The bankruptcy laws prevent you from using bankruptcy to modify the primary mortgage against your house, but that protection doesn’t extend to subsequent, junior liens.
For example, let’s say you own a house worth $500,000 here in New York City. The homestead exemption is about $170,000. You have a first mortgage with a principal balance of $400,000, and a home equity loan with a balance of $50,000. This debtor may be able to get rid of that second mortgage since there is no equity securing that lien (the first mortgage plus the exemption is greater than the value of the house, so the home equity loan isn’t “attached” to any equity in the home).
As you can see, this can be hugely valuable to homeowners that took out equity but then their home values decreased, since the benefits allows debtors to remove lots of secured debt from their homes. Even better is that a debtor doesn’t have to prove any undue hardship to successfully avoid a lien. Keep in mind, however, that any lien that is “stripped” becomes a general, unsecured nonpriority debt, and must be treated by the regular payments under the debtor’s chapter 13 plan.
How long does a chapter 7 vs chapter 13 bankruptcy stay on my credit report?
Many people thinking about filing bankruptcy want to know about its impact on their credit score, including how long a bankruptcy will stay on their credit report. The short answer is that the notation of bankruptcy can stay on your report for up to ten years. The credit bureaus unilaterally decide on the length of time that bankruptcy is reported. Generally, the credit bureaus will report a Chapter 7 bankruptcy on your credit report for 10 years from the date you filed the bankruptcy petition. On the other hand, the credit bureaus will generally report a Chapter 13 bankruptcy on your credit report for 7 years from the date you filed your bankruptcy paperwork.
Which is a better type of bankruptcy: Chapter 7 vs Chapter 13?
If you are considering bankruptcy, by now you know all about Chapter 7 and Chapter 13. Chapter 7 bankruptcy is called “straight bankruptcy” because it gets you a bankruptcy discharge of your debts in about four to five months. Chapter 13 bankruptcy is known “adjustment of debts” because it requires you to pay back some or all of your debts pursuant to a court-approved chapter 13 payment plan of either 3 or 5 years.
As you have seen, deciding which chapter is better to file is really dependent on your individual circumstances, including your income, your assets, and the types of debt you have. As a general idea, if you can qualify to file a chapter 7, it’s probably recommended over chapter 13. That being said, chapter 13 bankruptcy does offer greater flexibility that may not be available to debtors in chapter 7 bankruptcy, by allowing you to repay debts with a court-supervised monthly payment.
If you need help to figure out the difference between chapter 7 vs chapter 13 for your bankruptcy filing, then you may want the help of an experienced bankruptcy lawyer, like Richard Kistnen. Don’t put off your financial fresh start and improving your credit score any longer! Contact the Law Office of Richard Kistnen today to speak with a knowledgeable bankruptcy attorney about your bankruptcy filing. Book your confidential, no-obligation consultation by clicking here , or schedule your appointment by using the contact info below.