Are you thinking of filing for bankruptcy, but in dilemma on the differences between a Chapter 7 and a Chapter 13 bankruptcy?
There are pros and cons to both bankruptcy options, so let’s consider the differences. For example, you may be able to get a discharge from unsecured debt from both options, but one is considerably more expensive than the other.
These two bankruptcy types often differ in the following:
- Credit Implications
The purpose of this article is to provide an overview of the differences between Chapter 7 and Chapter 13 bankruptcy. We also wanted to provide the pros and cons of Chapter 7 and Chapter 13 bankruptcy and additional features about the bankruptcy.
1. An Overview of Chapter 7 and Chapter 13 Bankruptcy
In our experience in personal finance, we’ve come across multiple people that are in distress from filing a Chapter 13 bankruptcy discharge. This is likely because they were not educated about the differences between this option and other alternatives. From our interview with many Chapter 13 bankruptcy applicants, most of them don’t know the following:
- There are numerous payment plans for Chapter 7 bankruptcy fees.
- Chapter 13 bankruptcy is way more expensive than Chapter 7 bankruptcy
- Filing for Chapter 7 bankruptcy doesn’t mean you’ll lose your vehicle and house
Let’s go into more details of the two:
What is Chapter 7 Bankruptcy
Another name for Chapter 7 bankruptcy is a liquidation bankruptcy. These are bankruptcy petitions that are filed under Chapter 7 of the Bankruptcy Code.
In this bankruptcy type, any asset that’s not covered by an exemption will be sold and used to repay the debtor’s unsecured debts.
However, a good number of Chapter 7 bankruptcy cases don’t result in a loss of assets. But there’s still a risk of loss if bankruptcy exemptions don’t cover your assets. This means the only way to lose your property is if you don’t properly review the exemptions.
Also, some individuals decide to file Chapter 7 bankruptcy without a lawyer. That said, many individuals consider the costs of each option.
Only three entities that can apply for a Chapter 7 bankruptcy discharge, are;
- Individuals with primarily business debts
- Individuals that meet the Chapter 7 income requirements
This means that getting a Chapter 7 bankruptcy discharge means that you’ve met the income requirements. Businesses that file a Chapter 7 bankruptcy are liquidated and closed.
If you’re really keen about qualifying for a Chapter 7 bankruptcy, then it’s best to estimate your qualification through the Chapter 7 means test or you may read more about the process in this article.
One question about bankruptcy is whether you can rent after bankruptcy. Consider focusing on your references and how your income will come into play in your rent each month.
What is Chapter 13 Bankruptcy
A Chapter 13 Bankruptcy allows debtors to restructure their debts into a Chapter 13 repayment plan.
This bankruptcy is only limited to individuals with verifiable proof of steady income. Individuals that are self-employed and are income earners can also file under Chapter 13 if the income is a steady one. Businesses that want a bankruptcy that can allow them to restructure their loans can file for Chapter 11 bankruptcy instead, as that’s the only type of bankruptcy that offers businesses a debt restructure.
A good majority of Chapter 13 bankruptcy have a 60 months term. However, a debtor can propose a 36 months term payment. Numerous factors affect the exact amount of a plan, some of which include the person’s debts, assets, expenses, and income. In certain cases, their recent financial transactions may also affect the Chapter 13 plan.
If you don’t qualify for a Chapter 7 bankruptcy discharge, and you want to apply for a Chapter 13 bankruptcy, I’d advise that you first use this Chapter 13 calculator to estimate your payment plan.
2. Pros and Cons of Chapter 7 Bankruptcy
Individuals should first consider the several pros and cons that are attached to filing for a Chapter 7 bankruptcy before considering this as an option.
Here are some pros and cons you should first consider:
- Filing for Chapter 7 bankruptcy offers one of the quickest ways to get rid of unsecured debt. Most bankruptcy cases are closed within 6 months of filing. That said, you should consider what counts as bankruptcy fraud.
- Debtors don’t need to repay any portion of their unsecured debts
- Debtors can simply surrender their collateral to exit secured debt. Even if the collateral is worth less than the amount owed, he/she cannot collect the amount owed.
- The cheap cost of attorney fees in Chapter 7 bankruptcy is about one-half of the same fee in Chapter 13 bankruptcy.
- Properties that are not protected by exemptions can be protected by the trustee
- Individuals that can’t afford their payments may lose their home or car
- It’s not all debts that are discharged in Chapter 7 bankruptcy, thus, the debtor may still owe some money even when the case is closed. Debts that are non-dischargeable in Chapter 7 bankruptcy include student loans, alimony, child support, and most tax debts.
- One con may be that the bankruptcy is filed in the newspaper. That said, that may be unlikely.
3. Pros and Cons of Chapter 13 Bankruptcy
Just like other debt-relief options, Chapter 13 bankruptcy has its own pros and cons that should first be considered before making it a preferred option. Some pros and cons of Chapter 13 bankruptcy to consider are:
- Filing for a chapter 13 bankruptcy may help to prevent repossessions and foreclosures. It offers debtors a more favorable term to repay car payments and past mortgages in their Chapter 13 plan.
- The cost of attorneys in Chapter 13 cases is often more expensive than other bankruptcy types, however, attorneys have a payment plan that’s conducive to most debtors.
- You may include due payments and old tax debts in your Chapter 13 payment.
- Assets at risk of liquidation in Chapter 7 bankruptcy may not be liquidated in Chapter 13 plans. However, keeping your assets that aren’t covered by bankruptcy exemptions involves making extra payments.
For your reference, there are horror stories to consider when deciding whether Chapter 13 bankruptcy is right for you.
4. Factors to Consider When Deciding Between a Chapter 7 and Chapter 13 Bankruptcy
There are many things to choose from when selecting one from Chapter 7 and a Chapter 13 bankruptcy filing.
Here are some things to consider:
1. Foreclosures and Repossessions
A debt collection lawsuit is a common reason people consider bankruptcy. Another common reason is foreclosures. If you’ve fallen behind in mortgage payments, then you shouldn’t consider a Chapter 7 bankruptcy as it isn’t designed to help with such. However, a chapter 13 bankruptcy is effective in stopping foreclosures, and it does this by allowing users to catch up with mortgage debt through its Chapter 13 repayment plan.
Likewise, Chapter 7 is not a suitable option for those in need of a debt relief option for automobile loans. The lender will still require that you completely make past payments or full loan payments.
Chapter 13 bankruptcy on the other hand allows you to spread out your car payments over some years intending to reduce your payments. In certain instances, the bankruptcy court may permit you to “cram down” your debt if it’s worth far less than your loan payoff, and you’ve owned the vehicle for a minimum of 910 days to file a Chapter 13 discharge.
2. Equity in Assets and Property
Only a certain level of equity is protected by bankruptcy exemptions. If you own more assets than the bankruptcy discharge can cover, it’s possible to lose some of those properties through liquidation. However, you can negotiate for a slightly higher repayment plan to keep some of your assets.
3. Income Requirements
Chapter 7 bankruptcy is often one of the cheapest debt relief solutions. That said, there are requirements. There’s no doubt that choosing one of Chapter 7 bankruptcy and Chapter 13 bankruptcy is quite challenging. A factor to consider before making a choice is your earnings. One of the criteria for getting a Chapter 7 bankruptcy discharge is its means test, which is dependent on your income. If you really want to file for a Chapter 7 bankruptcy discharge, then it’s sacrosanct that you first read this article on how to pass the means test for Chapter 7 bankruptcy.
If upon calculating your median income you notice that it’s above your state’s median income then Chapter 13 may be an option.
Chapter 7 and Chapter 13 bankruptcy are complicated debt relief options. Hopefully, this article helps you understand the differences between the two options.