The truth is everyone’s situation is different and we’d need to analyze your specific circumstances. With that said, in many cases, Chapter 7 bankruptcy is a better fit than Chapter 13 bankruptcy. For instance, Chapter 7 is quicker, many filers can keep all or most of their property, and filers don’t pay creditors through a three to five year Chapter 13 repayment plan. But not everyone qualifies to file for Chapter 7 bankruptcy and in some cases; Chapter 7 doesn’t provide the help the filer needs.
Advantages of Chapter 7 Bankruptcy
Chapter 7 bankruptcy is an efficient way to get out of debt quickly, and most people would prefer to file this chapter, if possible. Here’s how it works:
• It’s relatively quick. A typical Chapter 7 bankruptcy case takes three to six months to complete.
• No payment plan. Unlike Chapter 13 bankruptcy, a filer doesn’t pay into a three- to five-year repayment plan.
• Many, but not all debts get wiped out. The person filing emerges debt-free except for particular types of debts, such as student loans, recent taxes, and unpaid child support. You can protect property. Although you can lose property in Chapter 7 bankruptcy, many filers can keep everything that they own. Bankruptcy lets you keep most necessities, and, if you don’t have much in the way of luxury goods, the chances are that you’ll be able to exempt (protect) all or most of your property.
• You can keep a house or car in some situations. You can also keep your house or car as long as you’re current on the payments, can continue making payments after the bankruptcy case, and can exempt the amount of equity you have in the property.
Who Should File for Chapter 7 Bankruptcy?
Chapter 7 works very well for many people, especially those who:
• own little property
• have credit card balances, medical bills, and personal loans (these debts get wiped out in bankruptcy), and
• whose family income doesn’t exceed the state median for the same family size.
You’ll take the means test to see if your income qualifies for this chapter. If your income is below the average income for a family of the same size in your state, you’ll automatically qualify. If your income is higher than the median, you’ll have another opportunity to pass. However, if after subtracting allowed expenses, including payments for child support, tax debts, secured debts such as a mortgage or car loan, you have income left over to make a significant payment to your creditors, you won’t qualify to file for Chapter 7 bankruptcy.
When Chapter 13 Might Meet Your Needs
Chapter 7 bankruptcy isn’t the best choice for everyone. Chapter 7 won’t help people whose debts won’t get wiped out, like certain income tax debt, student loans, and domestic support obligations. High-income filers find it hard to qualify. It’s also not a good fit for people who would lose substantial equity in a home or other property if they filed for Chapter 7 bankruptcy, or those facing foreclosure or repossession. For those individuals, Chapter 13 bankruptcy would likely be a better choice.
Disposable income is the amount that remains after subtracting allowed bankruptcy expenses from your monthly gross income. Your disposable income will determine whether you qualify to discharge debt in Chapter 7 or Chapter 13 bankruptcy.
Drawbacks of Chapter 13 Bankruptcy
Most people prefer Chapter 7 bankruptcy because, unlike Chapter 13 bankruptcy, it doesn’t require you to repay a portion of your debt to creditors. In Chapter 13 bankruptcy, you must pay all of your disposable income the amount remaining after allowed monthly expenses to your creditors for three to five years. When you claim your deductions, you’ll be able to use the actual cost of some expenses. For others, such as the allowance for food, clothing, and housing, you’ll use the national and local standards.
Here’s a list of some of the deductions you’ll be allowed to take:
• food and clothing
• housing and utilities
• transportation costs
• involuntary payroll deductions
• life insurance
• court-ordered payments, such as family support
• certain education costs
• childcare expenses, and
• health care costs.
To determine your disposable income, you’ll complete one of two forms, depending on the chapter you intend to file, each chapter allows for similar deductions. In a Chapter 7 case, you’ll complete the Chapter 7 Means Test Calculation form. You’ll deduct allowed expenses to find your disposable monthly income. Next, you’ll multiply that amount by 60 months. If the figure exceeds the maximum amount currently allowed which will be listed on the form, you won’t qualify for a discharge. Additionally, you might not qualify if your disposable income is sufficient to pay 25% or more of your unsecured, non-priority debt such as credit card balances, medical bills, and personal loans. In a Chapter 13 matter, you’ll fill out the Chapter 13 Calculation of Your Disposable Income form. The amount that remains after deducting expenses is your monthly disposable income. You’ll pay that number to your unsecured, non-priority creditors each month over the course of your three- to five-year repayment plan. Because each case is different, determining whether you qualify for bankruptcy can be challenging. When in doubt, contact a knowledgeable bankruptcy attorney.
Here are a few other things filers find challenging about Chapter 13 bankruptcy:
• You must complete the entire three to five year repayment plan before any qualifying debt balances get wiped out unless the court lets you off the hook early for hardship reasons.
• If you owe non-dischargeable past due taxes, or support arrearages, you’ll have to pay off the entire balance in your plan many people don’t have sufficient income to do so.
• To keep a house or car, you’ll need to repay the arrearages over the course of your plan while continuing to pay your regular monthly payment.
• Many people who file for Chapter 13 bankruptcy don’t complete their plans, so filers run a very real risk that their debts won’t be discharged.
Despite these potential problems, Chapter 13 bankruptcy is a good option for people who have a regular income to pay into a repayment plan, and who would otherwise lose their house to foreclosure or who need time to pay back tax or support arrearages. Many debtors assume that Chapter 7 bankruptcy is better than Chapter 13 bankruptcy because Chapter 13 bankruptcy requires debtors to repay some debt, whereas Chapter 7 bankruptcy wipes out qualifying debt without a repayment plan. But it isn’t that simple. Each bankruptcy chapter has unique tools that help solve distinct problems. For instance, a debtor who’d like to save a home from foreclosure will likely be better off filing for Chapter 13 bankruptcy because Chapter 7 bankruptcy doesn’t have a mechanism that will allow you to keep property when you’ve fallen behind on your payment. However, sometimes Chapter 13 bankruptcy is the only option because a debtor isn’t eligible for Chapter 7 bankruptcy.
Chapter 7 Bankruptcy Requirements
Some debtors cannot file for Chapter 7 bankruptcy leaving Chapter 13 bankruptcy as the only option. You cannot file for Chapter 7 bankruptcy if both of the following are true:
• Your current monthly income over the six months before your filing date is more than the median income for a household of your size in your state.
• Your disposable income, after subtracting certain expenses and monthly payments for debts you would have to repay in Chapter 13 bankruptcy, exceeds certain limits set by law. These calculations are referred to as the “means test.” They determine whether you have the means to repay a certain amount of your debt through a Chapter 13 repayment plan. If you do, you flunk the test and are ineligible for Chapter 7 bankruptcy.
The means test can get fairly complex, and, to make matters worse, uses unique definitions of “disposable income,” “current monthly income,” “expenses,” and other important terms, which sometimes operate to make your income seem higher, and your living expenses lower, than they are.
When Chapter 13 Might Be Better Than Chapter 7
Even if you are eligible for Chapter 7 bankruptcy, there are some situations when filing for Chapter 13 bankruptcy might be more advantageous than filing for Chapter 7 bankruptcy.
You’re behind on a Mortgage or Car Loan
In Chapter 13 bankruptcy, you can make up the missed payments over time and keep a home or car. You cannot do this in Chapter 7 bankruptcy. You can make up missed payments only in Chapter 13 bankruptcy. (Learn more about making up mortgage arrears and car loan arrears in Chapter 13 bankruptcy.)
You Have a Tax Obligation, Domestic Support Arrearages, or Other Debt You Can’t Discharge
You can use the Chapter 13 plan to pay these debts in full over three to five years.
You Need More Time to Repay Your Debts
When you have creditors coming after your wages and property, it can be tough to keep a roof over your head while paying your debt. With the protection of the bankruptcy court, you’ll have a better chance of doing both. The automatic stay stops creditor actions while you repay the debt over the course of a three- to five-year repayment plan.
How the Automatic Stay Works
The automatic stay is an order that’s put in place as soon as you file for bankruptcy. All collection efforts to collect money you owe other than child support and alimony, including calls, letters, and other techniques, must come to an immediate halt. It stops almost anyone who is trying to collect from you.
A few things that a creditor cannot do once the stay is in place include:
• garnishing your wages taking money out of your pay check
• levying on your bank account instructing the bank to withdraw funds
• foreclosing on your house
• repossessing your car, or
• moving forward with a civil lawsuit requesting a money judgment.
In most cases, the automatic stay will protect you throughout your case. If you’ve filed more than one bankruptcy case within a year, you might not receive as much or any protection. Depending on the number of times you’ve filed during the previous year, the stay could be limited to 30 days you filed one other matter or might not apply at all you filed two or more cases. If you find yourself with this problem and want the protection of the stay, you’ll have to file a motion asking the court to extend it or put it in place. The court will consider doing so if you explain why you filed the previous case and demonstrate that you aren’t gaming the system by repeatedly filing for bankruptcy. Also, it’s common for a creditor to file a motion to lift the automatic stay (a motion to remove the stay order) if, in a Chapter 13 case, you stop making your house payment and the creditor wants to move forward with a foreclosure. If the court grants the request, the judge will withdraw the stay order and allow the creditor to continue with collection efforts.
You Have Non-exempt Property You Want to Keep
When you file for Chapter 7 bankruptcy, you get to keep only exempt property—property protected from creditors under state or federal law. You have to give your non-exempt property to the bankruptcy trustee, who can sell it and distribute the proceeds to your creditors. In Chapter 13 bankruptcy, you don’t have to give up any property. Instead, you repay your debts out of your income. But that doesn’t mean that you get to keep more property than you would have had you filed for Chapter 7 bankruptcy. All filers can protect the same amount of assets. Here’s the difference: Only the Chapter 7 trustee sells non-exempt assets. In Chapter 13 bankruptcy you must pay for the value of the non-exempt assets you keep through your three to five year repayment plan. So, if you have non-exempt property that you can’t bear to part with, Chapter 13 bankruptcy might be the better choice if you can afford to pay for your non-exempt assets in addition to other required payment amounts. If you file for Chapter 7 bankruptcy, your co-debtor will still be on the hook, and your creditor will undoubtedly go after the co-debtor for payment. By contrast, if you file for Chapter 13 bankruptcy, the creditor will leave your co-debtor alone, as long as you keep up with your bankruptcy plan payments. Both Chapter 13 and Chapter 7 are bankruptcies, plain and simple, and both are reported as such on your credit report. A completed Chapter 13 plan will stay on your credit report for seven years, while a Chapter 7 bankruptcy discharge will be on your credit report for 10 years.
Chapter 7 is Faster but is It Better?
A Chapter 7 discharge is simply much faster to obtain. There are other more subtle reasons that Chapter 7 is “better,” as well. For instance, one may only obtain a discharge of debt in Chapter 7 every eight years the prior law was every six years. New creditors know this about debtors coming out of Chapter 7. They also know that the amount of debt owed is now $0 or at least substantially reduced, and they know debtors are “minimum payment acclimated,” meaning, debtors know how to make minimum payments on outstanding balances. However, Chapter 13 also looks good to some debtors. It’s particularly helpful when dealing with foreclosure, as well as mortgage modifications, car payments, and IRS problems. But the biggest problem with Chapter 13 is just how long it takes, and that all disposable income must go toward your payment plan for that set amount of time. With Chapter 7, you’ll pay less for your debts but you also have to qualify for Chapter 7 in the first place.
When you need a lawyer for bankruptcy (either chapter 13 or chapter 7), please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506