Chapter 13 vs. Chapter 7 Bankruptcy: Here’s How They Are Different
Typically, most consumers prefer to file a Chapter 7 bankruptcy over a Chapter 13 bankruptcy because it eliminates most unsecured debt and is a fairly quick and simple process. However, Chapter 7 bankruptcy eligibility has very specific requirements and not all debtors may qualify. On the other hand, even if you do qualify for a Chapter 7 bankruptcy, it may not offer the benefits of a Chapter 13 bankruptcy.
Below, our experts at ZocLaw.com discuss the important points to keep in mind when deciding which Chapter is best for your situation.
Chapter 13 vs. Chapter 7 Bankruptcy – Why Should I File a Chapter 13 Bankruptcy?
When comparing a Chapter 13 bankruptcy to a Chapter 7 bankruptcy, it may be in a debtor’s best interest to file a Chapter 13 bankruptcy for the following reasons:
You do not meet the requirements to file a Chapter 7 bankruptcy. According to current bankruptcy law, a debtor has to pass the “Means Test” in order to file a Chapter 7 bankruptcy. If your average monthly income for the past six months before filing bankruptcy is less or equal to average median income for the state in which you reside, then you may file a Chapter 7 bankruptcy. However, if your income surpasses the average median income for your state and if you are able repay a portion of your secured debt in a Chapter 13 payment plan, you do not qualify for a Chapter 7 bankruptcy.
You prefer to pay your debts. Some debtors would like to exercise good faith and pay back creditors. In a Chapter 13 bankruptcy, you are required to make monthly payments towards your debt over 3 to 5 years.
You want to prevent foreclosure on your home. In many circumstances, filing a Chapter 13 bankruptcy can immediately stop a foreclosure proceeding from going through. A bankruptcy provision called the Automatic Stay will temporarily stop a foreclosure until a repayment plan is put into place. Once your Chapter 13 bankruptcy payment plan is confirmed, the arrearage on your mortgage payments will be paid back via the Chapter 13 bankruptcy payment plan.
You want to save your vehicle from repossession. If you file a chapter 13 bankruptcy, you may prevent your vehicle from being repossessed. If you purchased your vehicle at least 2 years before filing bankruptcy, you may be able to reduce the amount you owe on the loan through a “cram down.” A cram down is particularly beneficial of your vehicle is worth less than the amount of the loan.
You want to keep non-exempt property. Unlike a Chapter 7 bankruptcy, a debtor may keep non-exempt property in a Chapter 13 bankruptcy. A Chapter 13 will permit the debtor to keep non-exempt property that the Trustee may have ceased in a Chapter 7.
You owe debts that are non-dischargeable in a Chapter 7. There are certain debts that are immune to a Chapter 7 bankruptcy, but maybe eligible to be included in the Chapter 13 bankruptcy payment plan. Some of these debts include:
• Court Fees.
• Debts incurred to pay back non-dischargeable taxes.
• Fees from a homeowners’ association, condominium, or a cooperative.
• Marital debts, excluding orders of support.
You have a large amount of non-dischargeable debt that you would prefer to pay back over time. There are some debts like a student loan or certain tax debt can survive both a Chapter 7 and 13. However, if you file a Chapter 13 bankruptcy, the debt can be paid off in the repayment plan.
You want to protect your co-debtor. A Chapter 13 bankruptcy will prevent creditors from going after your co-debtors provided that the creditor receives payment through the Chapter 13 bankruptcy payment plan. If there are any balances remaining on the debt once the payment plan has ended, the creditor may collect the amount still owed from your co-debtor. Although a Chapter 7 bankruptcy may eliminate the debtor’s obligation towards the debt, creditors can go after co-debtors.
Chapter 13 vs. Chapter 7 Bankruptcy – Why Should I File a Chapter 7 Bankruptcy?
A Chapter 7 bankruptcy is most suited for the following circumstances:
You are unable to make monthly payments toward a Chapter 13 bankruptcy payment plan. If you cannot afford to repay creditors for three or five years and if you qualify for a Chapter 7 bankruptcy, then it may be best to file a Chapter 7.
Most of your debt is dischargeable. If the majority of your debt falls under the category of dischargeable debt, a Chapter 7 bankruptcy will free you from the obligation to pay back the debt. Dischargeable debt include:
• Credit card bills
• Medical bills
• Personal loans
• Certain taxes
• Utility bills
You need a quick relief from creditors. If the vast majority of your debt is dischargeable, a Chapter 7 bankruptcy will free you from any personal obligation towards the debt.