Chapter 7 Bankruptcy or Chapter 13 Bankruptcy?
Each bankruptcy chapter has advantages and disadvantages, and both require that the petitioner meet certain qualifications. But what is the difference between Chapter 7 and Chapter 13? Below, we discuss these options in detail and weigh the pros and cons of Chapter 7 vs. 13. To learn more about which option is right for you, speak to a Memphis bankruptcy attorney at The Sweeney Law Firm, P.C. today.
What Is Chapter 7 Bankruptcy?
Nearly two third of bankruptcy filings are for Chapter 7. Both individuals and businesses can qualify for Chapter 7.
The process of filing for Chapter 7 is relatively fast, with most discharges obtained in less than 5 months. The process and results are simple: You eliminate most of your assets and all of your debts. You can then go on with your life, which is why most filers who qualify choose Chapter 7.
When a business uses Chapter 7, it closes its doors. The creditors liquidate what is left, and share the money obtained. The business, however, is gone. Businesses that want remain open will need to file under Chapter 11. Businesses cannot file under Chapter 13.
Essentially, Chapter 7 bankruptcy involves the liquidation of valuable assets in order to repay your creditors. In most cases, the bankruptcy trustee will not find anything to liquidate. You are entitled to certain exemptions up to a certain amount and certain property is also exempt from liquidation. For instance, you may be able to preserve equity on your home or a vehicle that you use to get to work.
Advantages of Chapter 7 Bankruptcy
Chapter 7 is the most popular form of bankruptcy for a reason. It’s a simple, painless process to discharge the majority of your debt. You won’t have to repay it later and you can start rebuilding your credit as soon as the bankruptcy is finalized. For those who have a lot of unsecured debt, Chapter 7 is ideal.
For instance, if you have a lot of credit card debt or significant medical expenses that you won’t be able to pay off, Chapter 7 can help give you a clean slate to start over.
Disadvantages of Chapter 7 Bankruptcy
Chapter 7 does not handle secured debt well at all. In cases where your debt is mostly either mortgage, car loans, or other forms of debt, Chapter 7 won’t do you much good. In addition, there are some forms of debt that Chapter 7 cannot discharge, even if it’s unsecured.
Chapter 7 also requires that you pass a means test. The means test prevents those who have the funds to repay their creditors from using Chapter 7 to stiff them in bad faith. Essentially, you must either prove that your income is below the state median for a single family or that, if your income is above the state median, that you have insufficient funds left over to pay your necessary expenses.
Also, Chapter 7 can only discharge secured debt after you’ve released possession of the property. For instance, if you’re behind on your mortgage you cannot simply file for Chapter 7 and keep your home. You could release other funds that you are using to pay off unsecured debt to pay off your mortgage. If you are forced to give up your home, you can be released from contract and discharge the outstanding balance.
Another major disadvantage of Chapter 7 is that it will remain on your credit report for the next 10 years. It’s something to keep in mind, however, as you weigh your options.
What Is Chapter 13 Bankruptcy?
One difference between Chapter 7 and Chapter 13 is that in a Chapter 13, you will make payments on your debts for 3 to 5 years. Chapter 13 can make financial sense when you have fallen behind on mortgage payments but want to keep your house. It can also help you clear a second mortgage for pennies on the dollar.
Chapter 13 allows you to reorganize your debt into manageable payments. You and your attorney will submit a repayment plan to the court. Your creditors will have a chance to object, but eventually, a deal will be struck.
Advantages of Chapter 13 Bankruptcy
The major advantage of Chapter 13 is that it allows you to discharge more forms of debt than does Chapter 7. Chapter 13 filers will have the option to keep their home if they are behind on their mortgage payments. They may be able to discharge a second mortgage or qualify for a “cramdown” on their car payments. Cramdowns allow you to pay off the current balance on your loan, but the principal is reduced to the real current value of the item. Interest, late fees, and other loan-related debt is shaved off and discharged as unsecured debt and you only have to make payments on what the car is worth now.
The process of paying off a Chapter 13 bankruptcy occurs over three to five years. Instead of staying on your credit report for 10 years, it will be removed after seven.
In addition, Chapter 13 can help you if you are not eligible for Chapter 7 because you:
- filed for Chapter 7 within the last 8 years,
- make more than the median household income, or
- have a lot of non-exempt assets which would be taken from you under Chapter 7 bankruptcy.
Disadvantages of Chapter 13 Bankruptcy
Unlike Chapter 7, Chapter 13 is restricted in terms of the amount of debt you owe. While any individual, couple, or sole proprietor may file, if they owe over $394,725 in unsecured debt or over $1,184,200 in secured debt, they cannot file under Chapter 13.
Chapter 13 discharges far less of your debt than does Chapter 7. It also requires that you make payments on that debt within your means. It creates a hierarchy of debt that can manage any number of debts, but if you cannot make those payments or you miss a payment, your Chapter 13 will end up back in court and may be dismissed. As soon as the Chapter 13 is dismissed, your creditors will again begin harassing you for payments and may be able to file suit or win a judgment against you. If they do, they can put a lien on your home or other real estate that you own. In the case of your home, they will not be able to force the sale, but you will lose equity when you attempt to resell the home.
Chapter 7 vs. 13: Which Chapter Is Best for Me?
A number of factors go into determining which form of bankruptcy is best for your individual situation. Some people find that other methods of repaying their debts, such as debt consolidation, are better, while some will make too much money to qualify under Chapter 7 and owe too much money to qualify under Chapter 13. In that case, they will need to file for Chapter 11.
Key factors will include your yearly income, they type of debt you owe, and your ability repay at least a portion of those debts. A bankruptcy attorney can help you make this important decision and provide recommendations on the best course of action.
Talk to a Memphis TN Bankruptcy Attorney Today
We are a trusted bankruptcy law firm that pursues fair, reasonable and solution-focused strategies on behalf of our clients. Learn more about your options and alternatives to foreclosure. Contact The Sweeney Law Firm, P.C. today to work with a bankruptcy lawyer who cares about your situation.