What is the difference between a Chapter 7 and Chapter 13
Qualify to File for Chapter 7 Bankruptcy?
“Determining whether you’re eligible requires that you pass something known as the “means test.” Under the means test, if your average gross income for the six months prior to filing is less than the median income of your state, you automatically qualify. If your income exceeds the median, you might still be eligible because the second step of the test allows you to deduct certain expenses, such as income taxes, health care premiums, and childcare costs, from your gross income.
To find your state’s median income, visit the U.S. Trustee website. In the box titled, “Data Required for Completing the 122A Forms and the 122C Forms,” select the most recent date. Click the “Median Family Income Based on State/Territory and Family Size” link to access the median income chart.
Can I Keep My Property?
Yes—at least some of it. The amount you can keep, or “exempt,” depends on your state’s exemption laws. Most states allow you to protect essential household goods, such as kitchenware, furniture, bedding, an inexpensive car, and some jewelry. Other types of exempt property include:
retirement funds, such as 401k accounts
Social Security, veteran’s benefits, and disability benefits, and
trade or professional tools.
While many people can keep all of their possessions, your nonexempt property becomes part of the bankruptcy estate and is sold for the benefit of your creditors. Many people end up keeping all of their possessions because they do not own any nonexempt items. But those who own a mix of exempt and nonexempt items will find that the latter will become part of their “bankruptcy estate,” which the trustee will sell for the benefit of their creditors. Common types of nonexempt property include:
homes with more equity than can be exempted
timeshares and rental property
boats, recreational vehicles, and motorcycles
artwork and collectibles
non-retirement investment accounts, and
stock or other ownership interests in a business, LLC, or corporation.
Of course, most people don’t want to lose any property, including nonexempt things. But from a practical standpoint, losing a treasured but nonexempt item can make sense if the total amount of debt wiped out will be significantly greater than the value of that item.
Example 1. Harry had $80,000 in credit card debt and could exempt all of his property except a classic 1964 Austin-Healey valued at $7,800. Harry decided to file for bankruptcy because even after relinquishing the car, he still netted $72,200 in debt savings.
But what happens if you don’t want to give up your property? There is a solution: You can buy it from the bankruptcy trustee—and usually at a discount. Sometimes the trustee will even let you pay for it in payments.
Example 2. Even though Harry knew filing for bankruptcy was the right thing to do, the Austin-Healey was the first car he ever bought, and after keeping it in pristine condition for years, he couldn’t bear to part with it. He didn’t have to. The trustee didn’t care who bought the Austin-Healy as long as the bankruptcy estate received the sale proceeds. So he deducted 20%—the amount it would cost him to sell the car—and sold it to Harry for $6,240. On top of that, the trustee gave Harry ten months to pay for it.
To find your state’s exemptions, check your local bankruptcy website or call the court clerk.
What Debts Are Discharged?
Chapter 7 bankruptcy wipes out, or “discharges,” almost all unsecured, nonpriority debts, including credit card debt, medical bills, personal loans, many lawsuit judgments, income taxes over three years old (though it’s rare), and past-due utility bills. Not all debts are wiped out, however. For instance, the following are not dischargeable:
secured debt (a mortgage or car payment)
priority unsecured debt (most income taxes, delinquent family support payments, and penalties and fines owed to the government), and
To find out more about the debt that survives bankruptcy, see Nondischargeable Debts: Debts You Can’t Discharge in Bankruptcy.
The Bankruptcy Process
The bankruptcy process begins when the debtor files a petition that discloses information about income and property, debts, and prior transactions. If you plan to retain a lawyer, take paycheck stubs and tax returns with you to your attorney meeting. The documents will help the attorney qualify you for Chapter 7 treatment and identify potential issues.
The automatic stay stops creditor calls.
As soon as you file, the court automatically issues an order called a “stay.” Once the automatic stay is in place, your creditors cannot contact you or attempt to collect from you. The calls come to a halt.”
Chapter 13 Bankruptcy
In Chapter 13 bankruptcy, you keep your property, but pay back all or a portion of your debts over a three to five-year period. This is unlike Chapter 7 bankruptcy, where most of your debts are cancelled but you may have to surrender some property to the bankruptcy trustee to pay your creditors. Because you end up paying most of your debts over time in Chapter 13 bankruptcy, it is also called reorganization bankruptcy.
Chapter 13 bankruptcy isn’t for everyone. Because Chapter 13 requires you to use your income to repay some or all of your debt, you’ll have to prove to the court that you can afford to meet your payment obligations. If your income is irregular or too low, the court might not allow you to file for Chapter 13.
If your total debt burden is too high, you are also ineligible. Your secured debts cannot exceed $1,184,200 and your unsecured debts cannot be more than $394,725 (as of April 2016). A “secured debt” is one that gives a creditor the right to take a specific item of property (such as your house or car) if you don’t pay the debt. An “unsecured debt” (such as a credit card or medical bill) doesn’t give the creditor this right.
The Chapter 13 Process
Before you can file for bankruptcy, you must receive credit counseling from an agency approved by the United States Trustee’s office. (For a list of approved agencies, go to the Trustee’s website at www.usdoj.gov/ust and click “Credit Counseling and Debtor Education.”) These agencies are allowed to charge a fee for their services, but they must provide counseling for free or at reduced rates if you cannot afford to pay.
In addition, you’ll have to pay the filing fee and file a packet of forms.
The Chapter 13 Repayment Plan
How Much You Must Pay
Your Chapter 13 plan must pay certain debts in full. These debts are called “priority debts,” because they’re considered sufficiently important to jump to the head of the bankruptcy repayment line. Priority debts include child support and alimony, wages you owe to employees, and certain tax obligations.
In addition, your plan must include your regular payments on secured debts, such as a car loan or mortgage, as well as repayment of any arrearages on the debts (the amount by which you’ve fallen behind in your payments).
The plan must show that any disposable income you have left after making these required payments will go towards repaying your unsecured debts, such as credit card or medical bills. You don’t have to repay these debts in full (or at all, in some cases). You just have to show that you are putting any remaining income towards their repayment.”