The Differences Between Chapter 7 and 13 Bankruptcy Filing: Which Option Is Better for You?

Interviewer: I just wanted to turn what is viewed as a negative into a positive. So when people are going to file, they are faced with two choices – Chapter 7 or Chapter 13. Can you explain the difference and why someone would go one way or another?

Chapter 7 Bankruptcy: Certain Debts Are Not Discharged

Court:  Yes. Chapter 7 is your classic bankruptcy. It’s also called ‘straight bankruptcy’.

What that means is, there are some exceptions of debts that aren’t discharged, but in general, all of your debts will be discharged by a Chapter 7 bankruptcy. They will be wiped out, and you will start over, not owing anybody any money.

Chapter 13 Bankruptcy: Bankruptcy Trustee and Payment Plans

With a Chapter 13, what happens is instead of completely wiping out those debts right away, you enter a payment plan. You are required to pay back a certain amount of money to your creditors over a period of time. The period of time can be either three or five years, and that depends on how much money you make.

The amount of money you pay each month, you pay to the trustee for your bankruptcy and then the bankruptcy trustee distributes that money to your creditors according to the law.

The amount you give them each month depends on how much you make and what your expenses are. So those are the two most common kinds.

Why Would You Choose a Chapter 13 Filing Instead of a Chapter 7?

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Interviewer: Why would anyone go for a 13 and repay people, when they could just go for a 7 and mostly wipe them out? Why would anyone file a 13?

Court: Most of the time, I do not advise clients to file a Chapter 13. That doesn’t mean there aren’t situations where it’s the right thing to do. You just pointed it out, why would you want to go through paying back people over a three-to-five-year period to get a discharge at the end, when you could have a fresh start right away?

You Retain Assets in a Chapter 13 Filing

The main reason people would want to file a Chapter 13 is that, unlike a Chapter 7, you can keep your assets. When you file a Chapter 13, you can keep, for example, a house with a lot of equity that you didn’t want to lose. Other examples would be a car or some other valuable possession that you wanted to hold onto. You wanted to file bankruptcy but you didn’t want to lose that asset.

Chapter 13 Bankruptcy Payment Plans Are Structured to Fit Your Budget

Then that’s the time you’ll want to file a Chapter 13, because you’ll be able to work a payment plan where you can keep the house, or keep the car, and make payments that fit your budget over time.

Chapter 13 Bankruptcy Filing Is Advantageous for People Who Earn High Incomes

Another reason would be if you make too much money. If you make more than a certain amount of income, then you can’t file a Chapter 7 bankruptcy. You have to go through a means test – a Chapter 7 means test – when you file bankruptcy. If you make more than the median income for your household size in your state, then you can’t file Chapter 7 bankruptcy.

A Chapter 7 Bankruptcy Filing Offers You a Fresh Financial Start

There are some exceptions to that, but that’s the general way that it works. There are some situations where you might want to look at Chapter 13, but the overwhelming majority of people don’t fit into those categories. It’s really much better for them to start over with a clean slate and do a Chapter 7.

By Court Koehler

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