| 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.
In a Chapter 7 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. 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.
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.
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, 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.
There are 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 usually
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, as low as $2,400.00, 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 only has to pay the value of collateral unless the collateral was
recently purchased, not the total amount owed, for secured debts (i.e. creditors
who have the right to repossess some piece of collateral, such as a car),
excluding mortgages, and only has to pay a reasonable interest rate on the
secured items (which the Supreme Court recently 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.
In Chapter 13, 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, 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 Courts may soon go to 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 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.
If one has received a prior discharge in bankruptcy from either a Chapter 7 or
a Chapter 13 bankruptcy case that was filed within the last eight years, that
person is not eligible to file Chapter 7. 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 $307,675.00 in
unsecured debts, or more than $922,975.00 in secured debts, that person may
not file Chapter 13 by law and therefore must file Chapter 7. These figures are
updated every April, and the figures provided are from the April 2004 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.
If one’s regular monthly income exceeds his or her regular monthly expenses
by $100.00 or more, that person must file a Chapter 13.
DISCRETIONARY DECISION INFLUENCES
If one owes back child support, that person can file Chapter 7 but will expose
him or herself to having all their assets seized and sold to pay the back child
support (even their exempt assets). So, those who owe back child support will
almost always file Chapter 13 rather than 7.
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 too recently
purchased. 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.
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 © 1997 to 2008 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.
In a Chapter 7 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. 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.
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.
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, 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.
There are 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 usually
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, as low as $2,400.00, 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 only has to pay the value of collateral unless the collateral was
recently purchased, not the total amount owed, for secured debts (i.e. creditors
who have the right to repossess some piece of collateral, such as a car),
excluding mortgages, and only has to pay a reasonable interest rate on the
secured items (which the Supreme Court recently 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.
In Chapter 13, 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, 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 Courts may soon go to 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 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.
If one has received a prior discharge in bankruptcy from either a Chapter 7 or
a Chapter 13 bankruptcy case that was filed within the last eight years, that
person is not eligible to file Chapter 7. 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 $307,675.00 in
unsecured debts, or more than $922,975.00 in secured debts, that person may
not file Chapter 13 by law and therefore must file Chapter 7. These figures are
updated every April, and the figures provided are from the April 2004 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.
If one’s regular monthly income exceeds his or her regular monthly expenses
by $100.00 or more, that person must file a Chapter 13.
DISCRETIONARY DECISION INFLUENCES
If one owes back child support, that person can file Chapter 7 but will expose
him or herself to having all their assets seized and sold to pay the back child
support (even their exempt assets). So, those who owe back child support will
almost always file Chapter 13 rather than 7.
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 too recently
purchased. 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.
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 © 1997 to 2008 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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