10 Jun Chapter 7 or Chapter 13 Bankruptcy Which is Right For You?
When people come to us because they’re considering filing for bankruptcy, they usually have a lot of questions. This is entirely natural. Bankruptcy is not something a lot of people have direct experience with, and the decision to file can be very stressful.
One of the issues many of our clients want to know about is deciding between filing for Chapter 7 or Chapter 13. To help you make this decision, here’s what you should know.
Qualifying for Bankruptcy
Even though both Chapter 7 and Chapter 13 bankruptcies are forms of personal bankruptcy, that doesn’t mean that every person can file for them. In order to file for bankruptcy you have to meet specific eligibility criteria. Your lawyer will explain these in more detail, but here are the basics.
- Chapter 7. If your debt is mainly consumer debt such as credit cards, to qualify for Chapter 7 you must be able to meet what is known as the “means test.” The means test essentially looks at what your income is after subtracting allowed expenses from the average income you’ve made over the past six months. If you make less than the state median income, you qualify. If you don’t have enough money left over after expenses, you also qualify. However, if your disposable income is too high, you can’t file for Chapter 7. This is a fairly complicated calculation, so don’t assume that you do not qualify just because your income is above the median. If your debt is not primarily consumer, for example if you are a small business owner, then the means test does not apply.
- Chapter 13. Chapter 13 is designed to allow you to repay your debts through a payment plan. To qualify, you have to be able to show that you have enough income—after you deduct expenses—to be able to pay those debts over the next several years. You must also not have unsecured debts that exceed $394,725 or secured personal debts that exceed $1,184,200. If you are above that debt ceiling, you may have to consider filing a personal Chapter 11 bankruptcy.
- Previous Bankruptcy. Even if you meet the above eligibility criteria, you might not be able to file Chapter 7 or Chapter 13 if you’ve filed for bankruptcy in the past several years. Basically, if you’ve filed for Chapter 7 within the past 8 years, or filed for Chapter 13 with the past 2 to 6 years, you might not be able to file again. Again, though, these deadlines are complicated, and it may be possible to file even if you are within these deadlines. Call our office and set up a consultation to learn whether you still qualify.
Choosing Chapter 7
So, let’s assume you qualify for both Chapter 7 and Chapter 13. Why should you choose chapter 7? Here are some of the most common reasons.
- You’ve lost your job or are underemployed, or have gotten a new job after a long period of unemployment. A lot of people who are out of work, or who aren’t earning enough, can use Chapter 7 to their advantage. Chapter 7 “liquidates” your debt and allows you to start over.
- You don’t have a lot of assets. You won’t have to sell all of your property if you file for Chapter 7. Even if you own a house, a car, or other types of property, you can usually keep much, if not all, of your possessions. Determining how much you own and how much, if any, of that property will be sold by the bankruptcy trustee should you file for Chapter 7 is one of the most important calculations you need to make before deciding to file.
- You have a lot of unsecured debt. Unsecured debt is debt that doesn’t have collateral. Credit cards, medical bills, and other unsecured obligations can be eliminated through Chapter 7.
Choosing Chapter 13
Chapter 13 Bankruptcy is sometimes a better option than Chapter 7. Even though most individuals file for Chapter 7 protection, Chapter 13 might be a good option for you if:
- You want to protect your house or your car . The most common reason we recommend Chapter 13 Bankruptcy to out clients is because they want to protect their house or car from foreclosure or repossession. Chapter 7 Bankruptcy allows you to protect some of your property during the bankruptcy process, but not all of it. If you have significant assets that aren’t exempt, Chapter 13 often allows you to keep this property as long as you can manage your payment plan. You can catch up on past do mortgage or car loan payments over time.
- You don’t qualify for Chapter 7. Not everyone can file chapter 7 bankruptcy. If you aren’t eligible for Chapter 7, Chapter 13 might be your only option.
- You have high student loans, tax debts, or other non-dischargeable debt. Not all debts are dischargeable through bankruptcy. If you owe money on a student loan, have unpaid back taxes, child support payments, or other specific types of non-dischargeable debt, you won’t be able to get rid of these through Chapter 7. However, you can create a payment plan through Chapter 13 that will allow you to repay these debts in an easier way, and often eliminate penalties in the process.
- Learn 11 things to know about Chapter 13 bankruptcy and how it works.
Talk to An Attorney Before You Decide
If you’re overwhelmed by the prospect of filing for bankruptcy and don’t know what to do; relax. Deciding to file, or deciding between Chapter 7 or Chapter 13, is something you should only do after you’ve talked to your bankruptcy attorney.