When is Chapter 7 Bankruptcy Better than Chapter 13 Bankruptcy?

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Written by Eva Bacevice, Esq.  
Updated July 31, 2019

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Deciding to file for bankruptcy is a big decision. You want to carefully examine the pros and cons as well as make certain that you are filing the appropriate bankruptcy type for your situation. The reality is that there isn’t always a right or a wrong choice. It’s about what is right for you in your current circumstances so long as you are keeping your priorities in mind. In this article we will examine the two types of bankruptcy options you have, as well as lay out circumstances that help answer the question which is right for you?

  • Chapter 7 vs. chapter 13

  • Qualifying for chapter 7

  • Evaluate your debts

    • Unsecured debt

    • Non-dischargeable debt

    • Secured debt

  • Exemption laws

  • Benefits of chapter 7

Chapter 7 vs. Chapter 13

To start, there are two main types (or chapters) of bankruptcy available to individual consumer debtors, chapter 7 and chapter 13. A chapter 7 is what you think of as a traditional bankruptcy, that is a liquidation of your assets (non-exempt only) resulting in a discharge of your debts, allowing you to walk away from (most) financial burdens and gain a “fresh start.” Chapter 7 cases are relatively quick, and will on average complete within four to six months of filing, with only one court hearing to attend in most cases.

Chapter 13, by contrast, is often called a “reorganization” or a “wage earners” bankruptcy, wherein you pay back some or all of the debts you owe to your creditor over a specific period of time (three to five years) through a chapter 13 plan.

When you initially look at it just in these simple terms it seems like a chapter 7 is the better choice. It’s faster, you don’t need to make payments, and you can get on with the rest of your life sooner. It’s not always the best decision however.

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Qualifying for chapter 7

First, you’ll want to be sure that you qualify to file a chapter 7. In order to qualify you must have an average household income which is below median income for a family of your size in your state. If you do not immediately qualify due to your income level, you’ll need to be able to pass the means test, which shows that after reasonable expenses you do not have any disposable income left at the end of the month to give to your creditors. If you do not qualify under either of these scenarios, then you will have to consider filing a chapter 13 if you are seeking the relief and protection of bankruptcy.

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Evaluate your types of debt

It is important to know what types of debt you have and how they are treated in a bankruptcy case when deciding if filing a chapter 7 case is right for you. There are three main categories of debt: secured debt, unsecured debt and non-dischargeable debt.

Secured debt

Secured debt is when you owe money on an item you purchased and that item serves as collateral for the debt. If you are current on your payments for secured debt it will most likely not be impacted by filing a chapter 7, although your creditor may request that you sign reaffirmation agreement promising to continue making payments. Filing for bankruptcy creates an immediate automatic stay which will stop any foreclosure or repossession actions. If you do not wish to keep the property or it is worth far less than you owe it may make sense to discharge the debt in a chapter 7. If your intention is to keep the secured property you are generally better off filing a chapter 13 if you have substantial equity in the property.

Unsecured debt

Unsecured debt is money you owe that is not linked to specific collateral, like credit card bills, medical bills, and payday loans. If the bulk of your debt is unsecured than filing for a chapter 7 will be ideal because unsecured debts will be discharged entirely in the majority of chapter 7 cases, and you can shed yourself of the financial burden in a short period of time.

Non-dischargeable debt

There are also categories of debt which are non-dischargeable, meaning that they survive the bankruptcy, and you will continue owing the debt even once your case has concluded. These debts include child support, alimony, student loans and most government debts. If a significant portion of your debt falls into this category chapter 7 may not be the best choice since it will not offer the relief you are seeking. If only some of your debt is non-dischargeable a chapter 7 may still be a good choice, since getting out from under the unsecured debts will free up more income to contribute toward your non-dischargeable debt. If these debts are significant, however, you might be best served paying them off through a chapter 13 plan.

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Exemption laws

Before you file a chapter 7 case make certain that you are fully aware of the exemptions you can apply. When you file a bankruptcy, whether chapter 7 or 13, you can protect your property up to varying amounts by using exemptions. In a chapter 7, if there is non-exempt property you can reasonably expect that the chapter 7 trustee is going to sell that property as part of the bankruptcy estate and distribute the proceeds to your creditors. If you have non-exempt property or “luxury items” you want to protect you may be better off filing a chapter 13.

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Benefits of chapter 7

Chapter 7 has many benefits over a chapter 13. It is much easier to file and the duration is much shorter than a chapter 13, and allows for the opportunity to wipe away most debts.There is no debt limit in chapter 7 cases as opposed to chapter 13 cases (although to be fair the debt limit in chapter 13 is very high) and there is no repayment plan to worry about. Additionally, you can move forward knowing that you will be able to keep your future income. If you are eligible to file a chapter 7 case and do not have any other issues, you can rest assured that chapter 7 is probably the right choice for you.

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