Should I File Bankruptcy Chapter 7 or Chapter 13?

The most common question asked by people contemplating filing bankruptcy is, “What type of bankruptcy should I file?”. Debtors should consider between Chapter 7 vs Chapter 13 bankruptcy.The debtor has two options: Chapter 7, which discharges your debts, or Chapter 13, which reorganizes your debts. 

The decision to file for bankruptcy is often difficult. Although often stigmatized, bankruptcy is a legal process offering individuals and businesses a fresh financial start by discharging debts or establishing a manageable repayment plan.

However, navigating the complexities of Chapter 7 and Chapter 13 bankruptcy without issues requires understanding and professional assistance.

Quick Summary:

• Chapter 7 and Chapter 13 bankruptcy offer distinct approaches to debt relief. Each has its advantages and considerations.
• Chapter 7, known as "liquidation" bankruptcy, involves the sale of non-exempt assets to pay off creditors, providing a fresh financial start for debtors.
• Chapter 13, often termed "reorganization" bankruptcy, entails creating a court-approved repayment plan spanning three to five years. It allows debtors to retain assets while repaying creditors based on disposable income.
• Key factors influencing the choice between Chapter 7 and Chapter 13 include income levels, asset protection, foreclosure and repossession concerns, and tax obligations.

What are the Differences Between Chapter 7 and Chapter 13?

Grasping the fundamental differences between the two is essential before delving into their specifics.

Chapter 7

Commonly referred to as "liquidation" bankruptcy, Chapter 7 involves the sale of non-exempt assets to pay off creditors. Eligible debts are discharged once the assets are liquidated, providing a fresh financial start.

Some crucial things to note about Chapter 7 include:

• While Chapter 7 involves liquidating non-exempt assets, debtors can retain certain essential assets protected by exemptions under state and federal laws.
• Debtors must pass a means test to qualify for Chapter 7 bankruptcy. The Means Test assesses the debtor's income and expenses to determine eligibility.
• Those with income below the state median may qualify for Chapter 7. Upon successful completion of the bankruptcy process, most unsecured debts, such as credit card debt and medical bills, are discharged. That means debtors are no longer obligated to repay them.
• Chapter 7 bankruptcy typically concludes within a few months after filing, making it a quicker option for debt relief.
• A Chapter 7 bankruptcy filing remains on the debtor's credit report for up to 10 years.

Chapter 13

Often called "reorganization" bankruptcy, Chapter 13 involves creating a court-approved repayment plan that spans three to five years. Debtors retain their assets while making regular payments to creditors based on their disposable income.

• Debtors retain all their assets and work toward repaying creditors through the court-approved repayment plan.
• There is no strict income threshold for Chapter 13 eligibility. However, debtors must have a regular income to fund the repayment plan.
• Debtors repay part or all of their debts through the court-approved repayment plan. At the end of the plan, any remaining eligible debts may be discharged, providing a structured path to debt relief.
• Chapter 13 bankruptcy requires adherence to a repayment plan lasting three to five years, allowing debtors to spread payments over time and catch up on missed mortgage or car payments.
• While Chapter 13 bankruptcy also affects credit scores, the impact may be less severe, as it demonstrates a commitment to repaying debts.

How Do I Know Which to File Between Bankruptcy Chapter 7 vs 13?

Determining whether to file for Chapter 7 or Chapter 13 bankruptcy involves assessing various factors that impact one's financial situation. Here are key issues to consider when deciding between these bankruptcy chapters:

Income

Income of the debtor is the most important factor in determining Chapter 7 vs Chapter 13 bankruptcy. A debtor’s average household monthly income for the previous six months must be at or below the median income of a similar-sized household for the debtor to qualify for Chapter 7. If they are above that income level, they may still qualify for Chapter 7. However, passing the Means Test is the first step towards qualification.

The Means Test takes into account different monthly expenses deemed necessary by the court. These expenses include mortgage loans, car payments, taxes, insurance, and child care. 

The Means Test is complicated; therefore, we recommend you seek legal counsel before attempting the test. If you do not pass, Chapter 13 will be your only personal bankruptcy option.

Some debtors file Chapter 13 even though they may qualify for Chapter 7. There is no income requirement in Chapter 13, although you will need consistent monthly income to afford the monthly payments. The inability to make monthly payments will result in a case dismissal.

Assets

Assets can determine which chapter is best. While a debtor may qualify for Chapter 7, they may own assets they cannot fully protect from seizure by the bankruptcy estate. Assets that cannot be fully exempt must either be paid for (up to the non-exempt value) or surrendered to the bankruptcy estate. Here's a breakdown of key assets to consider: 

Real Estate:

• Determine the equity in your primary residence and any additional properties you own.
• Under Chapter 7, non-exempt equity may be subject to liquidation to repay creditors.
• In Chapter 13, you can retain your home and catch up on missed mortgage payments through the repayment plan.

Vehicles:

• Assess the equity in your vehicles, including cars, trucks, motorcycles, boats, and recreational vehicles.
• Exemption laws protect a certain equity amount in vehicles in both Chapter 7 and Chapter 13 bankruptcy.
• In Chapter 7, non-exempt equity may be liquidated. In Chapter 13, you can retain your vehicles and repay any outstanding loan amounts through the repayment plan.

Personal Property:

• Catalog valuable personal property such as furniture, electronics, jewelry, and collectibles.
• Exemption laws safeguard specific categories of personal property up to a certain value.
• In Chapter 7, non-exempt personal property may be sold to satisfy debts. Chapter 13 allows you to retain your possessions and repay creditors over time.

Financial Accounts:

• Review bank account balances, investment accounts, retirement funds, and other financial assets.
• Exemptions protect certain cash amounts and assets in bank accounts and retirement funds.
• Exemptions will depend on what’s available in your state and the type of bankruptcy filed. These assets may be shielded from liquidation or used to fund a repayment plan in Chapter 13. 

Income and Future Earnings:

• Consider your present income and potential future earnings when determining eligibility for Chapter 7 or Chapter 13 bankruptcy.
• Chapter 7 requires passing the Means Test, which evaluates income levels and expenses to determine eligibility.
• Chapter 13 involves creating a repayment plan based on disposable income, allowing debtors to use future earnings to repay creditors over a specified period.

Business Interests:

• Evaluate any ownership interests in businesses, partnerships, or sole proprietorships.
• Business assets and income may be subject to liquidation or repayment under Chapter 7 or Chapter 13 bankruptcy, depending on their value and exemptions available.

Other Assets:

• Consider additional assets such as life insurance policies, valuable artwork, or potential legal claims.
• Exemption laws vary by state and may protect certain assets from creditors in bankruptcy proceedings.

If you find that your property cannot be fully exempted because it is worth too much, you will have a decision to make. Most trustees require buying back non-exempt property or else surrender the property.

If you are in Chapter 7, the asset will have to be bought back by the debtor within a short period that can range anywhere from three months to a year. This can be difficult if the value of the asset is high. In those instances, filing a Chapter 13 might be easier to handle. The payoff period in Chapter 13 is normally 3-5 years. 

If you don’t have any assets or your exemptions are sufficient to protect your property, then Chapter 7 is the best option for you.

Foreclosure

Another common reason why people file for bankruptcy is foreclosure. If you are looking to surrender your home and give up responsibility for the debt, then file a Chapter 7. 

However, many debtors want to keep their homes despite facing foreclosure. Chapter 13 is the most effective way to keep your home. Money owed to the mortgage company in arrears can be paid back to the mortgage company. Chapter 13 and its duration make this a much better choice.

Vehicle Repossession

If your vehicle is subject to repossession, then you should file a bankruptcy beforehand. The chapter you file will be based on when you can catch up on your unpaid balance. Can you catch up during the short length of Chapter 7? 

However, there are certain things you can do in a 13 that you can’t do in a 7, such as cramdowns and reducing the interest owed or, in rare situations, the principal balance. As a result, Chapter 13 is still a great option for debtors in these situations. 

Back Taxes

If you owe back taxes, you should consult a bankruptcy attorney before filing. Your taxes may be dischargeable in Chapter 7 or if not, your payments can be lowered in Chapter 13 as the interest rate is tolled.

Let Our Experienced Bankruptcy Attorneys Help You today!

The decision to pursue bankruptcy Chapter 7 vs 13 is a significant step toward regaining control of one's financial future. However, this decision necessitates careful consideration and guidance from an experienced attorney.

The Law Office of Jeffrey B. Kelly stands ready to assist individuals in Rome, GA, in their journey toward debt relief and a fresh start. Contact our bankruptcy attorneys today to schedule a free consultation and take the first step toward financial freedom.