What is the difference between chapter 7 and chapter 13 bankruptcy?

Bankruptcy can happen for many reasons. It could be because you lost your job or experienced a decrease in income. Job losses caused by the COVID-19 Pandemic are one example. Other cases involve unexpected expenses, such as medical bills, that could put people over the edge financially. As challenging bankruptcy can be, seeking legal help that will provide personalized case evaluation and counsel regarding debt-relief options can alleviate your situation.

Here is the difference between chapter 7 and chapter 13 bankruptcy.

How Chapter 7 Bankruptcy Works

One of the biggest benefits of a Chapter 7 is that you will not pay back creditors through a repayment plan. Instead, the court appoints a bankruptcy trustee to sell your nonexempt property—property you can’t protect with a bankruptcy exemption—for the benefit of your creditors. You will be able to protect most household belongings.

Not everyone qualifies for Chapter 7 bankruptcy, however. If you make too much money to meet income requirements, explore filing under Chapter 13 bankruptcy.

Chapter 7 Bankruptcy Frequently Asked Questions

How do I find out if I would qualify for Chapter 7 bankruptcy?

If your household income is lower than the median household income in your state, you are eligible. Or, if you do not have enough remaining to pay a meaningful amount to creditors through a Chapter 13 repayment plan, you will pass.

Will I lose property in Chapter 7 bankruptcy?

Your state decides whether you can use the federal exemptions or state exemption laws. Although exemption laws differ, you will typically be able to keep these types of property in bankruptcy:

  • Home equity.
  • Insurance.
  • Retirement plans.
  • Personal property.
  • Public benefits.
  • Tools used on the job.

Check your state exemption laws for other exemptions.

Which should I use—Chapter 7 or Chapter 13 bankruptcy?

Most people who file for bankruptcy choose to use Chapter 7 if they meet the eligibility requirements. Chapter 7 is a popular choice because, unlike Chapter 13, it does not require filers to pay back a portion of their debts.

How Chapter 13 Bankruptcy Works

Chapter 13 is a bankruptcy reorganization designed for debtors with regular income who have enough left over each month to pay back at least a portion of their debts.

Typically, Chapter 13 bankruptcy is for debtors who:

  • Don’t qualify for Chapter 7 but need debt relief to lower credit card payments, stop litigation, prevent a wage garnishment
  • Have non-dischargeable debts such as alimony or child support arrears they’d like to pay off over three to five years, or
  • Have fallen behind on a house or car payment and want to get caught up on missed payments and keep the property.

In Chapter 13 bankruptcy, the trustee does not sell your property. However, you must pay creditors an amount equal to the nonexempt property value. In exchange, you pay back all or a portion of your debts through a repayment plan.

Chapter 13 Frequently Asked Questions

How much of my debt will I have to repay if I file for Chapter 13 bankruptcy?

It will depend on the types of debt you have. Here are the general guidelines:

  • Bankruptcy fees. You must pay 100% of the bankruptcy filing fees, trustee commissions, and your attorney’s fees.
  • Priority debts. You must pay 100% of the following obligations: child and spousal support arrears owed to the parent or child; most tax debts except those first due at least three years before your bankruptcy filing; wages, salaries, or commissions you owe to employees up to a specific limit; and contributions owed to an employee benefit fund.
  • Secured debts. If you want to keep your home, car, or other secured property, you will have to pay 100% of the arrearage amount, 100% of debt secured by a tax lien, and remain current on the monthly payment.
  • Unsecured nonpriority debts. You will pay anywhere between 0% and 100% of the amount you owe, depending on your disposable income, the length of your repayment plan, and the total value of your nonexempt property (you will have to pay for it.

How long will my repayment plan last if I file for Chapter 13 bankruptcy?

If your gross household income exceeds the median yearly income for a household of your size in your state, your plan must last five years—unless you can pay 100% of your unsecured debt in a shorter period. If your income is less than your state’s median yearly income, you can propose a three-year plan.

We are facing foreclosure. If we file for Chapter 13 bankruptcy, can we keep our home?

You can pay off a mortgage “arrearage” (late, unpaid payments) over the length of a three- to five-year repayment plan. For this to work, you will need enough income to meet your current mortgage payment while paying off the arrearage and other required debts.

Once you file your Chapter 13 bankruptcy petition, the “automatic stay” stops foreclosure proceedings until your repayment plan is approved (or rejected) by the court. If approved, the mortgage lender must accept payments towards the arrearage over the length of your repayment period. If you make all the required payments and stay current on your regular monthly mortgage payments, you will avoid foreclosure and keep your home.

I owe back taxes to the IRS—can Chapter 13 bankruptcy help?

Yes. Although you must repay 100% of your tax debt (unless it qualifies for discharge because of its age), you can do so over three to five years.