In general, most debtors prefer to file for Chapter 7 because it eliminates most unsecured debt and is easier. However, not every debtor qualifies for Chapter 7. In some cases, repaying debt over time in a court-approved Chapter 13 repayment plan provides benefits that are unavailable in Chapter 7. Sometimes things can get quite complicated, so it is important to seek help in the face of a bankruptcy attorney. First, let’s understand the main differences between Chapter 7 and Chapter 13. We’ll look at the advantages and disadvantages of both and help you determine which one suits your case better.
Chapter 7 vs Chapter 13
What is Chapter 7 bankruptcy
Chapter 7 is a liquidation bankruptcy designed to wipe out your general unsecured debts such as credit cards and medical bills. To qualify for Chapter 7 bankruptcy, you must have little or no disposable income. If you make too much money, you may be required to file a Chapter 13 bankruptcy instead.
When you file for Chapter 7 bankruptcy, a trustee will be appointed to administer your case. In addition to reviewing your bankruptcy papers and supporting documents, the Chapter 7 trustee’s job is to sell your non-exempt property to pay back your creditors. If you don’t have any non-exempt assets, your creditors will receive nothing. As a result, Chapter 7 bankruptcy is typically for low income debtors with little or no assets who want to get rid of their unsecured debts.
What is Chapter 13 bankruptcy
Chapter 13 is a re-organization bankruptcy designed for debtors with regular income who can pay back at least some portion of their debts through a repayment plan. If you make too much money to qualify for Chapter 7 bankruptcy, you may be left with no choice but to file a Chapter 13 case. Many debtors, however, choose to file for Chapter 13 bankruptcy because it offers many benefits that Chapter 7 bankruptcy does not (such as the ability to catch up on missed mortgage payments or strip wholly unsecured junior liens from your house).
In Chapter 13 bankruptcy, you get to keep all your property (including non-exempt assets). In exchange, you pay back all or a portion of your debts through a repayment plan (the amount you must pay back depends on your income, expenses and types of debt). For this reason, Chapter 13 is frequently referred to as a re-organization bankruptcy. Usually, Chapter 13 bankruptcy is for debtors who can afford to make monthly payments for missed mortgage or car payments or pay off non-dischargeable debts such as alimony or child support arrears.
Chapter 7 advantages
1. Unpaid balances due after assets are distributed are erased (“discharged” in bankruptcy language).
2. The amount of debt you can erase is not limited.
3. Wages you earn and property you acquire (except for inheritances) after the bankruptcy filing date are yours.
4. Your case is often over in about 3-6 months, enabling you to get rid of the burden of debt quicker.
5. There is no minimum amount of debt required.
Chapter 13 advantages
1. You keep all your property, whether they are exempt or non-exempt.
2. The debts not canceled in a Chapter 7 discharge can be reduced in a Chapter 13 payment.
3. You have a longer period of time to pay the debt.
4. You have protection against creditor’s collection efforts and wage garnishment.
5. You have protection against foreclosure by your lender of your home.
6. Any co-signers are immune from the creditor’s efforts as long as the Chapter 13 plan provides for full payment.
7. You can file repeatedly.
8. You can file a Chapter 13 after your Chapter 7 discharge to pay off any remaining liens.
9. You can separate your creditors by class. Different classes of creditors receive different percentages of payment. This enables you to treat debts where there is a co-debtor involved on a different basis from debts incurred on your own.
Chapter 7 disadvantages
1. You lose your non-exempt property which is sold by the trustee.
2. If facing foreclosure on your home, lender’s efforts are only temporarily stalled by filing.
3. Some debts survive and can be collected after your case is closed (e.g., mortgage liens).
4. Co-signors of a loan can be stuck with your debt unless they file for similar protection.
5. Bankruptcy damages your credit rating.
6. You can file this type of bankruptcy only once every eight years.
7. It is difficult to withdraw a Chapter 7 filing.
Chapter 13 disadvantages
1. You pay your debts out of your disposable (post-bankruptcy) income. This ties up your cash over the repayment period.
2. Legal fees are higher since a Chapter 13 filing is more complex.
3. Some debts will survive after your bankruptcy case is closed and you must continue paying.
4. Your debt must be under $1,532,700 (e.g., unsecured debts are less than $383,175 and secured debts less than $1,149,525). These amounts are adjusted every three years.
5. Stockbrokers and commodity brokers cannot file a Chapter 13 bankruptcy petition.
6. Your debt can linger for years, burdening future income.