| Chapter 7 vs. Chapter 13 |
Prior to getting into a discussion on whether one might prefer to file Chapter 7
or Chapter 13, following is a brief description of each chapter:
Chapter 7
Chapter 7 is commonly known as “liquidation” or “total bankruptcy.” A Chapter
7 may be filed by an individual, a married couple, a sole proprietorship, or a
corporation. A married person may either file alone or with their spouse, as
circumstances dictate. See 11 U.S.C. § 109, here, indicating who may be a
Chapter 7 debtor, and note 11 U.S.C. § 727(a)(1), here, that indicates that only
people may get discharges in Chapter 7, not corporations, etc.
In a bankruptcy case, the debtor is allowed to retain all of the property that he
or she owns that is “exempt.” That is, each State determines how much real
estate and personal property one may retain in a bankruptcy proceeding which
takes place within that State (with certain exceptions relating to prior, recent
States of residence of the debtor). Any property the debtor owns which is in
excess of the values the State declares to be exempt is sold by the bankruptcy
trustee and the proceeds of the sale are given to the creditors unless the
Chapter 7 debtor can negotiate with the trustee to pay the trustee an amount
sufficient to settle the trustee's claim and let the debtor retain the un-exempt
assets.
In Indiana there are several exemptions which are too numerous and too
complicated to discuss here, but two of the more commonly used exemptions
are the “residential real estate exemption” and the “personal property
exemption.” These exemption amounts changed effective July 1, 2005 (to
debtors' advantage). According to these exemptions, a person filing
bankruptcy in Indiana may retain up to $15,000.00 equity in real estate in which
the debtor or a dependent of the debtor resides, and may retain up to
$8,000.00 of personal property. Married couples are each individually entitled
to these exemption amounts, so a married couple filing bankruptcy jointly can
actually protect up to $30,000.00 equity in real estate and $16,000.00 personal
property. These same exemptions apply in both Chapter 7 and Chapter 13
cases. Many commonly used exemptions in Indiana are listed in Indiana Code
34-55-10-2, here.
Debts which are generally dischargeable by a Chapter 7 include medical bills,
credit cards, utility bills, personal loans, signature loans, mortgages (if the real
estate is surrendered), car loans (if the car is surrendered), deficiency
balances due after the sale of a repossessed vehicle, and most other types of
consumer debt even if those debts have become a judgment from a lawsuit (i.e.
it is not usually true that once someone sues you that you can no longer file
bankruptcy on the debt, but sometimes the lawsuit makes the debt have to be
treated differently in the bankruptcy if you own real estate).
Debts which are not generally dischargeable by a Chapter 7 case include taxes
that are less than three years old, student loans (unless the debtor can show
that repayment of the student loans will cause an undue hardship on the
debtor or a dependent of the debtor—this is a very tough thing to show), debts
obtained by fraud, debts incurred from accidents involving alcohol or drugs,
debts incurred from willful or malicious behavior, child support, alimony,
property settlement debts in connection with a divorce decree, criminal
restitution, and certain other specifically defined types of debt.
When one files a Chapter 7, all of his or her dischargeable debts are wiped
out, and then the debtor decides if there are any debts that he or she would
like to retain. Debts are retained in a Chapter 7 by the debtor signing a
“reaffirmation agreement,” which is an agreement that says that the debtor has
voluntarily waived his or her right to discharge of the particular debt that is
being reaffirmed in return for some compensation, which is normally the right to
continue to have possession of some piece of collateral. For example, when
one files Chapter 7 his or her mortgage is discharged, but if the debtor wants
to retain the home he or she simply signs a reaffirmation agreement indicating
that he or she will retain the debt and keep making the mortgage payments
according to the original agreement so long as the bank allows him or her to
retain the home. It is common for debtors to reaffirm debts for car loans and
homes in order to retain those items. Reaffirmation agreements are discussed
in detail in 11 U.S.C. § 524(c), here.
There are at least two catches to reaffirming debts: One, banks normally
require that the debtor be current on the loan in order to reaffirm the debt, so if
one files Chapter 7 and is behind on his or her mortgage payments, he or she
may not be able to keep the home unless he or she can get the loan current
within a very short time, and Two, reaffirmation agreements are binding unless
they are withdrawn by the debtor within 60 days of the date on which the
agreement is filed with the court, or prior to the Order of Discharge being
issued, whichever occurs later. So, once the deadline to withdraw the
reaffirmation expires the debtor is locked into the reaffirmed debt, and if the
debtor later discovers that he or she cannot afford to repay the loan, the
bankruptcy filing will provide no protection to the debtor if the bank sues the
debtor and/or repossesses the collateral. Therefore, one should never
reaffirm a debt, even for a house or car, unless one is absolutely certain he or
she will be able to afford all of the payments on the reaffirmed loan.
The typical Chapter 7 case takes three to four months to complete, with the
debtor being required to attend only one brief hearing in most cases. At the
hearing, the bankruptcy trustee, or the debtor’s attorney in some jurisdictions,
will ask the debtor a series of questions in order to determine if there are any
issues in the bankruptcy case. If there are no issues, the debtor will receive an
Order of Discharge from the court in the mail around 60 to 70 days after the
date of the hearing, at which time the case is complete and the dischargeable
debts are wiped out.
After the bankruptcy case is complete, the debtor is responsible to pay only
those debts which are not dischargeable by Chapter 7 (such as child support
and taxes that are less than three years old) and any debts that the debtor
voluntarily reaffirmed (such as car loans and mortgages).
Chapter 7 is on one’s credit report for ten years, and realistically affects one’s
ability to get credit for twelve to thirty-six months, depending on several factors.
Chapter 13
Chapter 13 is commonly referred to as a “wage earner plan” or
“reorganization.” A Chapter 13 may be filed by an individual, a married couple,
or a sole-proprietorship, but may not be filed by a corporation. Married
persons may either file alone or with their spouse, as circumstances dictate.
In a Chapter 13 case, the debtor pays back a portion of their debt over three to
five years, based on what the debtor can afford to pay. The debtor does this
by first proposing a “Chapter 13 Plan” to the court, which indicates the amount
the debtor will pay each month and for how long. This money is paid to the
bankruptcy trustee assigned to the debtor’s case, and the bankruptcy trustee
disburses the money to all of the creditors according to the Chapter 13 Plan.
Generally, all of the debtor’s debts, including medical bills, credit cards, car
loans, taxes, and virtually every other type of debt, are lumped together into
the Chapter 13 Plan, so that the debtor will only have to pay one payment per
month, which is the Chapter 13 Plan. The only common exception to this are
mortgages, which in some divisions continue to be paid outside the Chapter 13
Plan directly by the debtor to the bank.
Even though all or most of one’s debts are lumped together into the Chapter
13 Plan payment, the amount of the payment is often considerably less than
the sum of all of the individual payments the debtor was making prior to filing
the Chapter 13, for several reasons: One, the debtor only has to pay a
percentage of the unsecured debt (i.e. creditors which do not have the right to
repossess a piece of collateral such as a car or home) depending on what the
debtor can afford to repay, and unsecured debts do not get paid any interest in
a Chapter 13 Plan. So, if one owes $24,000.00 in medical bills and was paying
them at 8% interest prior to filing Chapter 13, in the Chapter 13 Plan he or she
would only have to pay a fraction of this amount based on what the debtor
could afford, at 0% interest. The remaining unpaid portion of the medical bill is
discharged and may never be collected by the creditor. Two, the debtor in
many cases only has to pay the value of collateral unless the collateral was
recently purchased, not the total amount owed, for most secured debts (i.e.
creditors who have the right to repossess some piece of collateral, such as a
car), called a "cram down." This rules excludes mortgages. Further, the
debtor only has to pay a reasonable interest rate on the secured items (which
the Supreme Court determined to be the prime rate plus a 1% to 3% risk
adjustment). So, if one owes $14,000.00 at 18% interest on a vehicle prior to
filing chapter 13, and the vehicle is only worth $5,000.00, in a Chapter 13 Plan
the debtor would only have to pay $5,000.00 at 7% interest in order to keep
the car, and the remaining unpaid balance of $9,000.00 would be discharged.
In this way, a Chapter 13 Plan can take formerly unreasonably high monthly
payments and put them into a quite manageable single payment without the
debtor having to lose any property. However, if the vehicle was purchased
within 910 days of the filing of the Chapter 13, it may not qualify for the cram
down. Three, the debtor may be able to "strip" junior mortgages if he or she
can show that the amount owed on superior mortgage(s) exceeds the value of
the real estate, and files a motion to that effect. Four, in Chapter 13, in many
cases one may pay taxes which are nondischargeable through his or her
Chapter 13 Plan without being assessed any further interest or penalties.
One may also include arrearage due on a mortgage in a Chapter 13 Plan, and
the bank is forced to treat the debtor as if he or she is current on the mortgage
so long as the debtor does not miss any further mortgage payments. In this
way, debtors may stop foreclosure proceedings on their home and get the
missed mortgage payments caught back up within a reasonable budget.
The exemptions that apply in a Chapter 7 case also apply in Chapter 13 cases
(see Chapter 7, above), but even if a debtor is over the exemption limits in a
Chapter 13 case, he or she can still hang on to all of their unexempt property
without fear that the bankruptcy trustee will sell the property if he or she
arranges the Chapter 13 Plan appropriately. This is normally done by
increasing the amount of the Chapter 13 Plan payment until the bankruptcy
trustee is satisfied that he or she is receiving enough money through the
Chapter 13 Plan that selling the unexempt property is no longer necessary.
Debts which are generally dischargeable by a Chapter 13 include medical bills,
credit cards, utility bills, personal loans, signature loans, property settlements
from divorce decrees (but not support), mortgages (if the real estate is
surrendered), car loans (if the car is surrendered), deficiency balances due
after the sale of a repossessed vehicle, and most other types of consumer debt
even if those debts have become a judgment from a lawsuit (i.e. it is not usually
true that once someone sues you that you can no longer file bankruptcy on the
debt, but sometimes the lawsuit makes the debt have to be treated differently in
the bankruptcy if you own real estate).
Debts which are not generally dischargeable by a Chapter 13 case include
taxes that are less than three years old, student loans (unless the debtor can
show that repayment of the student loans will cause an undue hardship on the
debtor or a dependent of the debtor—this is a very tough thing to show), debts
incurred from accidents involving alcohol or drugs, child support, alimony,
criminal restitution, and certain other specifically defined types of debt.
Even though some types of debts are not dischargeable by Chapter 13 or any
chapter in bankruptcy, those debts can nonetheless often be cured and paid
off through the Chapter 13 Plan.
The typical Chapter 13 case requires that the debtor appear at only one brief
hearing in most cases, though some courts have two hearings (a "Meeting of
Creditors" and a "Confirmation" hearing). At the hearing, the bankruptcy
trustee will ask the debtor a series of questions to determine if there are any
issues in the case. If there are no issues, or after any issues that exist are
resolved, the court will normally deliver an “Order of Confirmation” to the debtor
in the mail. The Order of Confirmation is the court’s approval of the Chapter
13 Plan.
After completing one’s Chapter 13 Plan, the payments of which must last
between three and five years, the debtor will normally apply for and receive an
Order of Discharge from the court in the mail. Upon receiving the Order of
Discharge, the case is complete.
After the case is over, the debtor will be responsible to pay only those debts
which were not discharged by the Chapter 13 (such as child support) or not
paid off through the Chapter 13 Plan (such as mortgages and sometimes
student loans).
Chapter 13 is on one’s credit report for seven years, and will realistically affect
one’s ability to get credit for twelve to thirty-six months, depending on several
factors.
Chapter 7 vs. Chapter 13
Once one has decided to file bankruptcy, choosing whether to file Chapter 7 or
Chapter 13 is a major consideration. Some books about the different chapters
of bankruptcy can be found here. There are certainly more factors and
considerations than can be properly covered here, and one should always
consult with an attorney to make this decision, but some of the things one
should consider are as follows:
MANDATORY DECISION MAKERS
If one's income exceeds the median income for his or her state, that person will
in all likelihood have to file Chapter 13. This is called the "means test," and
those who have the means to fund a Chapter 13 Plan are generally required to
do so.
You can try to plug your income into a means test calculator to see if you
qualify for Chapter 7, or if you make too much money and will have to file
Chapter 13. One such online means test calculator can be viewed here,
though we do not warrant its usefulness or accuracy. The means test is found
in 11 U.S.C. § 707(b)(2)(a), here.
If one has received a discharge from a prior Chapter 7 or Chapter 11
bankruptcy case that was filed within the last eight years, or received a
discharge from a prior Chapter 12 or Chapter 13 that was filed within the last
six years, then that person is not eligible to file Chapter 7 according to 11 U.S.
C. § 727(a)(8) and (9), here. So, the only filing option for that person is
Chapter 13.
If the entity seeking to file bankruptcy is a corporation, then Chapter 13 is not
an option. Corporations may only file a Chapter 7 or Chapter 11 case (and
Chapter 11 is not discussed in any detail in this website).
If the person seeking to file bankruptcy owes more than $336,900 in non-
contingent, liquidated, unsecured debt, or more than $1,010,650 in non-
contingent, liquidated, secured debt, that person may not file Chapter 13 by
law and therefore must file Chapter 7 according to 11 U.S.C. § 109(e), here.
These figures are updated every April, and the figures provided are from the
April 2007 update.
If the person seeking to file bankruptcy does not have a steady source of
income from which to pay his or her Chapter 13 Plan payment, that person is
not allowed to file a Chapter 13 and therefore may only file a Chapter 7. This
ability to fund the Chapter 13 Plan is one of the requirements found in 11 U.S.
C. § 1325(a), here.
If one’s regular monthly income exceeds his or her regular monthly expenses
by $100.00 or more, that person must usually file a Chapter 13 since $100 is
normally deemed sufficient to fund at least a minimal Chapter 13 Plan.
DISCRETIONARY DECISION INFLUENCES
If one owes back child support, then that person can file Chapter 7 but may
expose him or herself to having their assets seized and sold to pay the back
child support (even their exempt assets). So, those who owe back child
support may want file Chapter 13 rather than 7. However, courts have been
rejecting efforts by trustees to attach a debtor's assets in Chapter 7 cases to
pay support obligations, so this may or may not actually affect the decision as
much as was anticipated.
One important factor to consider is whether or not one is current on the loans
for collateral he or she wants to keep. Typically, one must be current on a loan
to reaffirm the debt in a Chapter 7, but whether one is current or behind is
usually irrelevant in a Chapter 13 case in order to retain the collateral
(because a Chapter 13 Plan can cure loan delinquency).
Another consideration is the types of debts owed. Chapter 13 will protect one
from types of debts a Chapter 7 will not cure.
Also important to keep in mind is whether one is within his or her exemption
limits on property one wishes to retain. If the value of one’s personal property
or equity in residential real estate exceeds his or her exemptions, those items
will be sold by the bankruptcy trustee in a Chapter 7 case, whereas those items
may be protected by filing Chapter 13 and arranging the terms of the Chapter
13 Plan appropriately.
Whether one is “upside down” on a loan may also influence the chapter one
selects. Being “upside down” on a loan means that one owes more on a piece
of collateral than that collateral is worth. For example, if one owes $10,000.00
on a car that is only worth $6,000.00, that person is upside down on the loan
by $4,000.00. If that same person wants to keep the car, and he or she files
Chapter 7, he or she will usually have to reaffirm the debt for the original
contract terms in order to keep the vehicle or redeem the car for the fair market
value, which requires a new loan at usually a high interest rate. However, in a
Chapter 13 case, one only has to pay the value of the collateral or the amount
owed, whichever is less as long as the collateral was not purchased within 910
days of the bankruptcy filing. So, a Chapter 13 debtor could keep the car by
only paying $6,000.00, and the other $4,000.00 would be discharged by the
Chapter 13.
There are also a host of other non-legal considerations one must look at as
well to determine which chapter is best to file. For instance, if a debtor is
planning on retiring at some point over the next couple of years, Chapter 13
may not be a good option since that person’s ability to make the Chapter 13
Plan payments may cease to exist before the Chapter 13 Plan can be
completed. Or, if the debtor is planning on buying a house in the next year or
so, it may be tough to get a bank loan when one is in the middle of a Chapter
13 Plan, and one must get approval from the court to even get the loan if the
Chapter 13 Plan is still in progress. Similarly, if the debtor is going to have
children soon, it is important to plan ahead how that will affect the debtor’s
income and ability to fund a Chapter 13 Plan. Another thing to consider is the
possibility of future medical debt. If the debtor has a medical condition in which
he or she continues to incur medical debt, and will for some time, it may be
better to file Chapter 13, leaving to option to convert to Chapter 7 later to
discharge post-petition medical debt if it becomes too much for the debtor to
pay. If that same debtor were to file Chapter 7 right now, and then incur
$20,000 in medical debt over the next year, he or she could not discharge that
liability since he or she could not file Chapter 7 again for 8 years from the first
Chapter 7, and thus would be required to file Chapter 13 and complete a 3 to 5
year Plan to get relief, plus have a second bankruptcy on his or her credit
report.
All of the above mandatory and discretionary factors and others of varying
complexity come together to make the decision between Chapter 7 and
Chapter 13 a daunting one. One is encouraged to seek the counsel of an
attorney in order to get assistance with this important decision.
Copyright © by Joseph A. Ross. All rights reserved.
This website is designed to provide general information only. The information
presented in this site should not be construed to be formal legal advice nor the
formation of an attorney-client relationship. Persons accessing this website are
encouraged to seek independent legal counsel for guidance regarding their
individual circumstances.
or Chapter 13, following is a brief description of each chapter:
Chapter 7
Chapter 7 is commonly known as “liquidation” or “total bankruptcy.” A Chapter
7 may be filed by an individual, a married couple, a sole proprietorship, or a
corporation. A married person may either file alone or with their spouse, as
circumstances dictate. See 11 U.S.C. § 109, here, indicating who may be a
Chapter 7 debtor, and note 11 U.S.C. § 727(a)(1), here, that indicates that only
people may get discharges in Chapter 7, not corporations, etc.
In a bankruptcy case, the debtor is allowed to retain all of the property that he
or she owns that is “exempt.” That is, each State determines how much real
estate and personal property one may retain in a bankruptcy proceeding which
takes place within that State (with certain exceptions relating to prior, recent
States of residence of the debtor). Any property the debtor owns which is in
excess of the values the State declares to be exempt is sold by the bankruptcy
trustee and the proceeds of the sale are given to the creditors unless the
Chapter 7 debtor can negotiate with the trustee to pay the trustee an amount
sufficient to settle the trustee's claim and let the debtor retain the un-exempt
assets.
In Indiana there are several exemptions which are too numerous and too
complicated to discuss here, but two of the more commonly used exemptions
are the “residential real estate exemption” and the “personal property
exemption.” These exemption amounts changed effective July 1, 2005 (to
debtors' advantage). According to these exemptions, a person filing
bankruptcy in Indiana may retain up to $15,000.00 equity in real estate in which
the debtor or a dependent of the debtor resides, and may retain up to
$8,000.00 of personal property. Married couples are each individually entitled
to these exemption amounts, so a married couple filing bankruptcy jointly can
actually protect up to $30,000.00 equity in real estate and $16,000.00 personal
property. These same exemptions apply in both Chapter 7 and Chapter 13
cases. Many commonly used exemptions in Indiana are listed in Indiana Code
34-55-10-2, here.
Debts which are generally dischargeable by a Chapter 7 include medical bills,
credit cards, utility bills, personal loans, signature loans, mortgages (if the real
estate is surrendered), car loans (if the car is surrendered), deficiency
balances due after the sale of a repossessed vehicle, and most other types of
consumer debt even if those debts have become a judgment from a lawsuit (i.e.
it is not usually true that once someone sues you that you can no longer file
bankruptcy on the debt, but sometimes the lawsuit makes the debt have to be
treated differently in the bankruptcy if you own real estate).
Debts which are not generally dischargeable by a Chapter 7 case include taxes
that are less than three years old, student loans (unless the debtor can show
that repayment of the student loans will cause an undue hardship on the
debtor or a dependent of the debtor—this is a very tough thing to show), debts
obtained by fraud, debts incurred from accidents involving alcohol or drugs,
debts incurred from willful or malicious behavior, child support, alimony,
property settlement debts in connection with a divorce decree, criminal
restitution, and certain other specifically defined types of debt.
When one files a Chapter 7, all of his or her dischargeable debts are wiped
out, and then the debtor decides if there are any debts that he or she would
like to retain. Debts are retained in a Chapter 7 by the debtor signing a
“reaffirmation agreement,” which is an agreement that says that the debtor has
voluntarily waived his or her right to discharge of the particular debt that is
being reaffirmed in return for some compensation, which is normally the right to
continue to have possession of some piece of collateral. For example, when
one files Chapter 7 his or her mortgage is discharged, but if the debtor wants
to retain the home he or she simply signs a reaffirmation agreement indicating
that he or she will retain the debt and keep making the mortgage payments
according to the original agreement so long as the bank allows him or her to
retain the home. It is common for debtors to reaffirm debts for car loans and
homes in order to retain those items. Reaffirmation agreements are discussed
in detail in 11 U.S.C. § 524(c), here.
There are at least two catches to reaffirming debts: One, banks normally
require that the debtor be current on the loan in order to reaffirm the debt, so if
one files Chapter 7 and is behind on his or her mortgage payments, he or she
may not be able to keep the home unless he or she can get the loan current
within a very short time, and Two, reaffirmation agreements are binding unless
they are withdrawn by the debtor within 60 days of the date on which the
agreement is filed with the court, or prior to the Order of Discharge being
issued, whichever occurs later. So, once the deadline to withdraw the
reaffirmation expires the debtor is locked into the reaffirmed debt, and if the
debtor later discovers that he or she cannot afford to repay the loan, the
bankruptcy filing will provide no protection to the debtor if the bank sues the
debtor and/or repossesses the collateral. Therefore, one should never
reaffirm a debt, even for a house or car, unless one is absolutely certain he or
she will be able to afford all of the payments on the reaffirmed loan.
The typical Chapter 7 case takes three to four months to complete, with the
debtor being required to attend only one brief hearing in most cases. At the
hearing, the bankruptcy trustee, or the debtor’s attorney in some jurisdictions,
will ask the debtor a series of questions in order to determine if there are any
issues in the bankruptcy case. If there are no issues, the debtor will receive an
Order of Discharge from the court in the mail around 60 to 70 days after the
date of the hearing, at which time the case is complete and the dischargeable
debts are wiped out.
After the bankruptcy case is complete, the debtor is responsible to pay only
those debts which are not dischargeable by Chapter 7 (such as child support
and taxes that are less than three years old) and any debts that the debtor
voluntarily reaffirmed (such as car loans and mortgages).
Chapter 7 is on one’s credit report for ten years, and realistically affects one’s
ability to get credit for twelve to thirty-six months, depending on several factors.
Chapter 13
Chapter 13 is commonly referred to as a “wage earner plan” or
“reorganization.” A Chapter 13 may be filed by an individual, a married couple,
or a sole-proprietorship, but may not be filed by a corporation. Married
persons may either file alone or with their spouse, as circumstances dictate.
In a Chapter 13 case, the debtor pays back a portion of their debt over three to
five years, based on what the debtor can afford to pay. The debtor does this
by first proposing a “Chapter 13 Plan” to the court, which indicates the amount
the debtor will pay each month and for how long. This money is paid to the
bankruptcy trustee assigned to the debtor’s case, and the bankruptcy trustee
disburses the money to all of the creditors according to the Chapter 13 Plan.
Generally, all of the debtor’s debts, including medical bills, credit cards, car
loans, taxes, and virtually every other type of debt, are lumped together into
the Chapter 13 Plan, so that the debtor will only have to pay one payment per
month, which is the Chapter 13 Plan. The only common exception to this are
mortgages, which in some divisions continue to be paid outside the Chapter 13
Plan directly by the debtor to the bank.
Even though all or most of one’s debts are lumped together into the Chapter
13 Plan payment, the amount of the payment is often considerably less than
the sum of all of the individual payments the debtor was making prior to filing
the Chapter 13, for several reasons: One, the debtor only has to pay a
percentage of the unsecured debt (i.e. creditors which do not have the right to
repossess a piece of collateral such as a car or home) depending on what the
debtor can afford to repay, and unsecured debts do not get paid any interest in
a Chapter 13 Plan. So, if one owes $24,000.00 in medical bills and was paying
them at 8% interest prior to filing Chapter 13, in the Chapter 13 Plan he or she
would only have to pay a fraction of this amount based on what the debtor
could afford, at 0% interest. The remaining unpaid portion of the medical bill is
discharged and may never be collected by the creditor. Two, the debtor in
many cases only has to pay the value of collateral unless the collateral was
recently purchased, not the total amount owed, for most secured debts (i.e.
creditors who have the right to repossess some piece of collateral, such as a
car), called a "cram down." This rules excludes mortgages. Further, the
debtor only has to pay a reasonable interest rate on the secured items (which
the Supreme Court determined to be the prime rate plus a 1% to 3% risk
adjustment). So, if one owes $14,000.00 at 18% interest on a vehicle prior to
filing chapter 13, and the vehicle is only worth $5,000.00, in a Chapter 13 Plan
the debtor would only have to pay $5,000.00 at 7% interest in order to keep
the car, and the remaining unpaid balance of $9,000.00 would be discharged.
In this way, a Chapter 13 Plan can take formerly unreasonably high monthly
payments and put them into a quite manageable single payment without the
debtor having to lose any property. However, if the vehicle was purchased
within 910 days of the filing of the Chapter 13, it may not qualify for the cram
down. Three, the debtor may be able to "strip" junior mortgages if he or she
can show that the amount owed on superior mortgage(s) exceeds the value of
the real estate, and files a motion to that effect. Four, in Chapter 13, in many
cases one may pay taxes which are nondischargeable through his or her
Chapter 13 Plan without being assessed any further interest or penalties.
One may also include arrearage due on a mortgage in a Chapter 13 Plan, and
the bank is forced to treat the debtor as if he or she is current on the mortgage
so long as the debtor does not miss any further mortgage payments. In this
way, debtors may stop foreclosure proceedings on their home and get the
missed mortgage payments caught back up within a reasonable budget.
The exemptions that apply in a Chapter 7 case also apply in Chapter 13 cases
(see Chapter 7, above), but even if a debtor is over the exemption limits in a
Chapter 13 case, he or she can still hang on to all of their unexempt property
without fear that the bankruptcy trustee will sell the property if he or she
arranges the Chapter 13 Plan appropriately. This is normally done by
increasing the amount of the Chapter 13 Plan payment until the bankruptcy
trustee is satisfied that he or she is receiving enough money through the
Chapter 13 Plan that selling the unexempt property is no longer necessary.
Debts which are generally dischargeable by a Chapter 13 include medical bills,
credit cards, utility bills, personal loans, signature loans, property settlements
from divorce decrees (but not support), mortgages (if the real estate is
surrendered), car loans (if the car is surrendered), deficiency balances due
after the sale of a repossessed vehicle, and most other types of consumer debt
even if those debts have become a judgment from a lawsuit (i.e. it is not usually
true that once someone sues you that you can no longer file bankruptcy on the
debt, but sometimes the lawsuit makes the debt have to be treated differently in
the bankruptcy if you own real estate).
Debts which are not generally dischargeable by a Chapter 13 case include
taxes that are less than three years old, student loans (unless the debtor can
show that repayment of the student loans will cause an undue hardship on the
debtor or a dependent of the debtor—this is a very tough thing to show), debts
incurred from accidents involving alcohol or drugs, child support, alimony,
criminal restitution, and certain other specifically defined types of debt.
Even though some types of debts are not dischargeable by Chapter 13 or any
chapter in bankruptcy, those debts can nonetheless often be cured and paid
off through the Chapter 13 Plan.
The typical Chapter 13 case requires that the debtor appear at only one brief
hearing in most cases, though some courts have two hearings (a "Meeting of
Creditors" and a "Confirmation" hearing). At the hearing, the bankruptcy
trustee will ask the debtor a series of questions to determine if there are any
issues in the case. If there are no issues, or after any issues that exist are
resolved, the court will normally deliver an “Order of Confirmation” to the debtor
in the mail. The Order of Confirmation is the court’s approval of the Chapter
13 Plan.
After completing one’s Chapter 13 Plan, the payments of which must last
between three and five years, the debtor will normally apply for and receive an
Order of Discharge from the court in the mail. Upon receiving the Order of
Discharge, the case is complete.
After the case is over, the debtor will be responsible to pay only those debts
which were not discharged by the Chapter 13 (such as child support) or not
paid off through the Chapter 13 Plan (such as mortgages and sometimes
student loans).
Chapter 13 is on one’s credit report for seven years, and will realistically affect
one’s ability to get credit for twelve to thirty-six months, depending on several
factors.
Chapter 7 vs. Chapter 13
Once one has decided to file bankruptcy, choosing whether to file Chapter 7 or
Chapter 13 is a major consideration. Some books about the different chapters
of bankruptcy can be found here. There are certainly more factors and
considerations than can be properly covered here, and one should always
consult with an attorney to make this decision, but some of the things one
should consider are as follows:
MANDATORY DECISION MAKERS
If one's income exceeds the median income for his or her state, that person will
in all likelihood have to file Chapter 13. This is called the "means test," and
those who have the means to fund a Chapter 13 Plan are generally required to
do so.
You can try to plug your income into a means test calculator to see if you
qualify for Chapter 7, or if you make too much money and will have to file
Chapter 13. One such online means test calculator can be viewed here,
though we do not warrant its usefulness or accuracy. The means test is found
in 11 U.S.C. § 707(b)(2)(a), here.
If one has received a discharge from a prior Chapter 7 or Chapter 11
bankruptcy case that was filed within the last eight years, or received a
discharge from a prior Chapter 12 or Chapter 13 that was filed within the last
six years, then that person is not eligible to file Chapter 7 according to 11 U.S.
C. § 727(a)(8) and (9), here. So, the only filing option for that person is
Chapter 13.
If the entity seeking to file bankruptcy is a corporation, then Chapter 13 is not
an option. Corporations may only file a Chapter 7 or Chapter 11 case (and
Chapter 11 is not discussed in any detail in this website).
If the person seeking to file bankruptcy owes more than $336,900 in non-
contingent, liquidated, unsecured debt, or more than $1,010,650 in non-
contingent, liquidated, secured debt, that person may not file Chapter 13 by
law and therefore must file Chapter 7 according to 11 U.S.C. § 109(e), here.
These figures are updated every April, and the figures provided are from the
April 2007 update.
If the person seeking to file bankruptcy does not have a steady source of
income from which to pay his or her Chapter 13 Plan payment, that person is
not allowed to file a Chapter 13 and therefore may only file a Chapter 7. This
ability to fund the Chapter 13 Plan is one of the requirements found in 11 U.S.
C. § 1325(a), here.
If one’s regular monthly income exceeds his or her regular monthly expenses
by $100.00 or more, that person must usually file a Chapter 13 since $100 is
normally deemed sufficient to fund at least a minimal Chapter 13 Plan.
DISCRETIONARY DECISION INFLUENCES
If one owes back child support, then that person can file Chapter 7 but may
expose him or herself to having their assets seized and sold to pay the back
child support (even their exempt assets). So, those who owe back child
support may want file Chapter 13 rather than 7. However, courts have been
rejecting efforts by trustees to attach a debtor's assets in Chapter 7 cases to
pay support obligations, so this may or may not actually affect the decision as
much as was anticipated.
One important factor to consider is whether or not one is current on the loans
for collateral he or she wants to keep. Typically, one must be current on a loan
to reaffirm the debt in a Chapter 7, but whether one is current or behind is
usually irrelevant in a Chapter 13 case in order to retain the collateral
(because a Chapter 13 Plan can cure loan delinquency).
Another consideration is the types of debts owed. Chapter 13 will protect one
from types of debts a Chapter 7 will not cure.
Also important to keep in mind is whether one is within his or her exemption
limits on property one wishes to retain. If the value of one’s personal property
or equity in residential real estate exceeds his or her exemptions, those items
will be sold by the bankruptcy trustee in a Chapter 7 case, whereas those items
may be protected by filing Chapter 13 and arranging the terms of the Chapter
13 Plan appropriately.
Whether one is “upside down” on a loan may also influence the chapter one
selects. Being “upside down” on a loan means that one owes more on a piece
of collateral than that collateral is worth. For example, if one owes $10,000.00
on a car that is only worth $6,000.00, that person is upside down on the loan
by $4,000.00. If that same person wants to keep the car, and he or she files
Chapter 7, he or she will usually have to reaffirm the debt for the original
contract terms in order to keep the vehicle or redeem the car for the fair market
value, which requires a new loan at usually a high interest rate. However, in a
Chapter 13 case, one only has to pay the value of the collateral or the amount
owed, whichever is less as long as the collateral was not purchased within 910
days of the bankruptcy filing. So, a Chapter 13 debtor could keep the car by
only paying $6,000.00, and the other $4,000.00 would be discharged by the
Chapter 13.
There are also a host of other non-legal considerations one must look at as
well to determine which chapter is best to file. For instance, if a debtor is
planning on retiring at some point over the next couple of years, Chapter 13
may not be a good option since that person’s ability to make the Chapter 13
Plan payments may cease to exist before the Chapter 13 Plan can be
completed. Or, if the debtor is planning on buying a house in the next year or
so, it may be tough to get a bank loan when one is in the middle of a Chapter
13 Plan, and one must get approval from the court to even get the loan if the
Chapter 13 Plan is still in progress. Similarly, if the debtor is going to have
children soon, it is important to plan ahead how that will affect the debtor’s
income and ability to fund a Chapter 13 Plan. Another thing to consider is the
possibility of future medical debt. If the debtor has a medical condition in which
he or she continues to incur medical debt, and will for some time, it may be
better to file Chapter 13, leaving to option to convert to Chapter 7 later to
discharge post-petition medical debt if it becomes too much for the debtor to
pay. If that same debtor were to file Chapter 7 right now, and then incur
$20,000 in medical debt over the next year, he or she could not discharge that
liability since he or she could not file Chapter 7 again for 8 years from the first
Chapter 7, and thus would be required to file Chapter 13 and complete a 3 to 5
year Plan to get relief, plus have a second bankruptcy on his or her credit
report.
All of the above mandatory and discretionary factors and others of varying
complexity come together to make the decision between Chapter 7 and
Chapter 13 a daunting one. One is encouraged to seek the counsel of an
attorney in order to get assistance with this important decision.
Copyright © by Joseph A. Ross. All rights reserved.
This website is designed to provide general information only. The information
presented in this site should not be construed to be formal legal advice nor the
formation of an attorney-client relationship. Persons accessing this website are
encouraged to seek independent legal counsel for guidance regarding their
individual circumstances.
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relief under the Bankruptcy
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respect to Title 11 of the United
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help people file for bankruptcy
relief under the Bankruptcy
code. The services and/or
benefits we provide are with
respect to Title 11 of the United
States Code.
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