Reasons to File for Chapter 7 Bankruptcy Instead of Chapter 13
When it's time to file bankruptcy, many people prefer filing Chapter 7 bankruptcy instead of Chapter 13. Chapter 7 has many advantages, such as discharging most medical bills, personal loans, and credit card debt.
Read on to explore the advantages of Chapter 7 for debt relief.
Advantages of Chapter 7 Bankruptcy
Filing for Chapter 7 bankruptcy isn't for everyone, even though it is popular. Eligibility based on your financial situation is a key factor.
You must qualify by meeting an income test (called the "means test"). Additionally, debt is discharged in exchange for giving up valuable nonexempt assets. A bankruptcy trustee sells these assets to pay creditors. For this reason, Chapter 7 is sometimes called a liquidation bankruptcy.
Take the time to weigh the pros and cons of different types of bankruptcy, mainly Chapter 7 and Chapter 13 bankruptcy.
1. You Receive a Fresh Start
The Chapter 7 bankruptcy process aims to give you a new start. Eliminating debt frees you from personal liability for the discharged debt. However, some types of debt are not dischargeable. Non-dischargeable debt includes:
- Student loans
- Child support
- Certain types of tax debt
- Fraud-related debts
Certain liens on property, such as a mortgage, a tax lien, or a mechanic's lien, remain after completing Chapter 7 bankruptcy.
2. You Will Keep Future Income
The property you acquire or will acquire after a Chapter 7 bankruptcy filing is not included in the bankruptcy estate.
The following forms of property acquired within 180 days after filing your bankruptcy petition will become part of the estate:
- Inherited property
- Property from a divorce decree or settlement agreement
- Death benefits
- Life insurance policy proceeds
3. No Limitations on Your Debt Amount
Unlike Chapter 13 bankruptcy, Chapter 7 bankruptcy rules do not impose a limit on the amount of debt you can have.
Under Chapter 13, you cannot file for bankruptcy if secured or unsecured debt exceeds the debt limits.
4. No Debt Repayment Plan
Under Chapter 7, you do not have to repay debt in a court-approved repayment plan, unlike in a Chapter 13 bankruptcy. In Chapter 7, you are no longer responsible for repaying the debt after its discharge.
5. Debt Discharge Occurs Quickly
In a typical Chapter 7 case, the discharge of debt may occur in as little as three months. The court will issue a discharge order about 60 to 90 days after you file for bankruptcy. The bankruptcy court will close the case after the trustee distributes your non-exempt property, if any, to unsecured creditors.
Disadvantages of Chapter 13 Bankruptcy
In some cases, repaying debt in a court-approved Chapter 13 repayment plan provides benefits unavailable in Chapter 7. But there are disadvantages to Chapter 13, including:
1. Only Individuals Are Eligible (Even for Business Debts)
You must file as an individual to petition for bankruptcy under Chapter 13. If you have personal liability for business debts, you can still file if:
- You are the sole owner of a business or have a business partner
- You file as an individual, not as your business
2. You Must Repay Creditors
Chapter 13 bankruptcy requires repayment to creditors using a three to five-year repayment plan.
So, you must have enough regular income to make the monthly bankruptcy plan payments to creditors. You must repay:
- Priority debts and secure creditors in full
- Unsecured creditors an amount equal to what those creditors would have received if your trustee sold your non-exempt property in a Chapter 7 bankruptcy
3. You Must Meet Debt Limitation Requirements
You are ineligible for Chapter 13 if your unsecured or secured debt exceeds a certain amount. This amount changes year to year.
Chapter 7 does not have debt limits. You may need to consider it if your debt exceeds these amounts.
When To Choose Chapter 13
It may be more appropriate for you to choose Chapter 13 if:
- You want a reorganization
- You do not qualify for Chapter 7 under the "means test" (if your income exceeds your state's median income)
- You have the disposable income to repay some unsecured debt in a Chapter 13 repayment plan
- You want to repay debt with monthly payments in a three to five-year plan
- Your bankruptcy trustee will handle the distribution to creditors
- You want to save your home from foreclosure with an automatic stay, especially if you have equity in your home
- You need to catch up on mortgage arrears
- You want to stop the repossession of your car
- You want to reduce the interest rate on your car loan
- You want to keep non-exempt property in exchange for repayment to unsecured creditors
- You have debts that are not dischargeable under Chapter 7
- You have a nondischargeable debt that you want to repay over time
- You have a co-debtor
Keeping Your House and Car
This is one of the primary differences between Chapter 7 and Chapter 13 bankruptcy. Under Chapter 7, you may have to return your house or car to the creditor (e.g., the bank). Or you might arrange to pay the item's wholesale value.
In Chapter 13, you will likely be allowed to keep the house or car if you stay current with a court-ordered payment system.
A Note on Foreclosure
While both bankruptcies will temporarily stop foreclosure, Chapter 13 may be a better option for permanently stopping it.
Once a Chapter 13 repayment plan is confirmed, you will pay back the missed payments over the life of the plan. The terms and conditions of the original agreement will govern the debtor and the lender's relationship.
But Chapter 13 will not prevent foreclosure if you filed for bankruptcy within the past two years, and the bankruptcy court lifted the automatic stay to allow the creditor to proceed with foreclosure.
In Chapter 7, you're less likely to keep your home if you are behind on mortgage payments. The court can, and often will, grant a lender's request to lift an automatic stay to continue foreclosure proceedings on the home.
You may also want to look into homestead exemption laws in your state.
Debts Owed as a Result of Past Crimes
Your debts will likely not be discharged in Chapter 7 if the creditor objects and can prove you have a prior court conviction.
You must pay for criminal debts as part of the Chapter 13 plan. But under certain circumstances, the balance may be wiped out if the outstanding debts are not paid in full by the end of Chapter 13 bankruptcy.
Debts Owed for Child Support, Alimony, Student Loans
These debts will not be discharged. You cannot avoid support debts through Chapter 7 bankruptcy.
If you cannot pay these off by the end of Chapter 13 bankruptcy, you still owe the remaining balance, even after the bankruptcy.
Nonsupport Debts Owed in a Divorce, Property Settlement, or Agreement
If a creditor (often the spouse) objects, then these debts will not be discharged unless you demonstrate that:
- .You will still be unable to pay these debts after bankruptcy; and
- The benefit of wiping out this debt exceeds the detriment caused to the creditor
Any remaining balance at the end of Chapter 13 bankruptcy will be erased.
Not Sure Whether to File Chapter 7 or Chapter 13? Contact a Bankruptcy Attorney
The decision to file for bankruptcy is complex. Choosing the appropriate form of bankruptcy and preparing to file involves many considerations you might not be aware of—until it's too late. Some bankruptcy lawyers offer free consultations to help filers decide the right bankruptcy option.
Let an attorney who knows bankruptcy exemptions and the Bankruptcy Code guide you through your bankruptcy case.