Chapter 13 Bankruptcy vs. Chapter 7

Authored by Wendy Witt, Esq.

If you're thinking that bankruptcy is the right path for you and wondering whether you should file under Chapter 13 or 7, you're asking the same question many folks in your situation ask. And though you absolutely must consult with a bankruptcy attorney for legal advice about your individual situation, we'll provide solid and helpful educational information so you can ask your attorney good questions.

"Chapter 13" and "Chapter 7" both refer to sections of the U.S. Bankruptcy Code. Both chapters are appropriate for individuals and married couples filing personal bankruptcy.

Here are the main considerations in determining under which bankruptcy chapter to file:

Income

  • In general, Chapter 13 is for higher income folks, those whose income is above the median income for their state. If you don't qualify for Chapter 7, Chapter 13 is your most likely option.

  • In general, Chapter 7 bankruptcy is for "lower" income folks, those whose income is below the median (middle) income for their state. You must pass the "means test" to qualify for Chapter 7.

    An important caveat: There is more than one way to pass the means test. If you don't automatically qualify by having an income less than the median income of your state, don't count yourself out. Your living expenses may help you qualify.

Dischargeable Debt

  • Under Chapter 13, debts are not generally dischargeable, but for unsecured second and third mortgages which can be discharged.

    However, debts can be reorganized and renegotiated, meaning that you have to pay back what you owe, but the interest rate may be reduced or eliminated and you have a longer period of time (3 to 5 years) to pay back your debt.

    If you have a lot of non-dischargeable debts such as student loans, taxes, and the like, you may want to file Chapter 13 even if you qualify for Chapter 7.

  • Under Chapter 7, many unsecured debts are discharged. Unsecured debt means there's no lien securing the debt. Examples are credit card debt, medical bills, and personal loans.

    Although, student loans, criminal fines, taxes, alimony, and child support are unsecured debts, they are NOT dischargeable in bankruptcy. (Note: Under a few very rare circumstances, some taxes are dischargeable.)

    Second and third mortgages that have become unsecured because they are no longer secured by the value of a home are dischargeable under Chapter 7 bankruptcy.

    If you have a lot of dischargeable debt and qualify, Chapter 7 bankruptcy may be right for you.

Keeping Your House and Car

  • Under Chapter 13, you can keep your house and car so long as you can make all the payments, past, present, and future. Keep in mind you must be able to pay the mortgage(s), taxes, and insurance.

    Chapter 13 gives you more time to pay back payments because past debts are amortized over 3 to 5 years. There is no such leeway when filing under Chapter 7.

    Filing Chapter 13 will halt foreclosure and car repossession. You still have to deal with the debt, but the court's automatic stay gives you some time to do so.

    If you can make all your present and future payments, would benefit from having time to pay off back payments, and you want to keep you house and car, Chapter 13 may be right for you.

  • Under Chapter 7, you can keep your house and car so long as you can make all the payments AND the equity in both is covered by your homestead and wild card exemptions or another protection such as tenancy by the entireties law.

    Filing Chapter 7 will halt foreclosure and car repossession. You still have to deal with the debt, but the court's automatic stay gives you some time to do so.

    If you qualify for Chapter 7, your equity is protected, you can make all your related payments, and you want to keep you house and car, Chapter 7 may be right for you.

  • Read our article, "Keeping Your House in Bankruptcy", for more detailed information.

A qualified bankruptcy attorney will be able to answer your unique questions and provide legal guidance as to whether Chapter 7 or Chapter 13 bankruptcy is right for you or even whether bankruptcy is appropriate in the first place.

You are invited to use our free website, www.attorneys.org, to find and select a bankruptcy attorney. You are entitled to a free case evaluation when you do so.

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