How does chapter 7 bankruptcy work compared to chapter 13?
What’s The Difference Between A Chapter 7 Bankruptcy And A Chapter 13?
Filing for bankruptcy can seem like an overwhelming process if you do not educate yourself about the different options. In general, the majority of individuals who are struggling with significant debt will opt to file for Chapter 7 bankruptcy because it is seen as easier and helps to eliminate the majority of the unsecured debt. However, not every person who considers filing for bankruptcy will be eligible to file for Chapter 7. In certain situations, paying back your debts over a three to five-year period in a repayment plan under Chapter 13 may be a better fit for you.
Read on to learn more about the differences between Chapter 13 and Chapter 7 bankruptcy. It may make sense to file for Chapter 13 bankruptcy if you meet any of the following qualifications:
- You want to repay your debt.
- You may wish to keep some of your non-exempt property and make monthly payments over a three to five-year plan so that the bankruptcy trustee distributes these payments out to the creditors. You will need to have enough income in order to comply with the terms of the repayment plan and recognize that if you fall behind on your payments or fail to keep current on your other obligations, that you may lose that property.
- You do not qualify to file for Chapter 7. You must complete a means test in order to qualify for filing for Chapter 7 bankruptcy. If the average monthly income for you for the six-month period before filing for bankruptcy is less than or equal to your estate’s median income, you may be eligible to file for Chapter 7. In the event that your income exceeds that, however, and you have plenty of disposable income in order to make a repayment plan, you will not qualify for Chapter 7.
- You want to keep the non-exempt property or stop car repossession. Under Chapter 7, a trustee is responsible for selling any non-exempt property in order to pay creditors with the proceeds from that sale. Filing for Chapter 13 can stop this as well as avoid the repossession of your car by allowing you to repay your debts.
- You have debts that cannot be discharged under Chapter 7. Certain debts will be eligible for discharging Chapter 13 that cannot be discharged in Chapter 7. These include:
- Marital debts associated with a settlement agreement
- Debts incurred to pay nondischargeable taxes
- Court fees
- Fees from a homeowner’s association, cooperative or condominium
- You want to save your home from foreclosure
Reasons to File for Chapter 13 Bankruptcy
Filing for Chapter 13 bankruptcy may be a one way to permanently stop the foreclosure process due to the automatic stay provision of bankruptcy. If you have filed for bankruptcy within the past two years, however, and the bankruptcy court has lifted this automatic stay, you may not be able to prevent foreclosure.
- You have a co-debtor. Filing for Chapter 13 bankruptcy is recommended when you have liability with co-debtors for a joint debt, in the event that the creditor would get payment through the repayment plan. In Chapter 7 bankruptcy, however, the filer’s personal liability is eliminated, but the co-debtor may remain responsible for their portion or all of it. A Chapter 7 bankruptcy is strongly recommended for individuals who:
- need quick relief from creditors
- are unable to make payments via repayment plan
- You have largely dischargeable debt