Should I File For Chapter 7 or Chapter 13 Bankruptcy?

If you have struggled to pay bills during the COVID 19 pandemic, you might be thinking about bankruptcy. But, what are the differences between Chapter 7 and Chapter 13 bankruptcy protection, and how do you know which is best? 

Bankruptcy Overview

Bankruptcy is the most common way to eliminate or reduce debt when you have more bills than you can pay. In some situations, it may be the last resort when there is no other way to catch up on your debt. 

Before considering bankruptcy, you could try to negotiate with your creditors. They may reduce the amount you owe by accepting a lump sum payment, or working out a monthly payment plan. 

However, if it turns out that you need to file for bankruptcy protection, there are two major chapters to consider: 

• Chapter 7: This is referred to as liquidation bankruptcy , which basically requires the debtor’s household’s income to be less than the household’s necessary and reasonable monthly expenses. This may be your solution if you have low income and no assets with a substantial value. 
• Chapter 13: This is referred to as reorganization bankruptcy and requires a monthly trustee payment plan that is 36 to 60 months long. Chapter 13 typically applies to people that do not meet the chapter 7 criteria, or want to save a house from foreclosure.

You should hire a Chapter 7 or Chapter 13 bankruptcy lawyer if you are considering either option. 

Typically, people that file a chapter 7 case can keep all of their assets. If a person’s property is completely exempt, he can keep all of his personal property and real estate. Each state may have different exemptions that are applied to personal property and real estate.

The state’s exemptions and where they reside may determine whether a person may keep some or all of their property in a Chapter 7 case. For example, a primary residence of any value is usually exempt from creditors in Florida. 

Paying Debts In Chapter 7 bankruptcy

Typically, a person would file a chapter 7 if they want to eliminate unsecured debt, such as credit card debt and personal loans. Basically, the law allows a person to eliminate and discharge the debt if they are legitimately unable to pay any monthly amount to the unsecured creditors.

A chapter 7 will not save a house from foreclosure if the debtor is behind with mortgage payments. However, in this scenario, the debtor (person filing) may be able to work out a loan modification with the mortgage company, ultimately saving the house. 

If a person wants to keep their house and avoid a mortgage foreclosure, they must keep current with their mortgage payments. In the event that a debtor is not current with the payments, the mortgage company will eventually be permitted to pursue a mortgage foreclosure action. Basically, the chapter 7 laws work the same regarding automobile financing. If a person is behind with payments, the finance company will eventually be permitted to repossess the car.

A debtor may always surrender property for any reason. If someone wants to surrender their house, they do not give the house to a trustee or the court. Rather, the mortgage company will be permitted to take the house by way of their foreclosure action and sheriff’s sale. If a car is surrendered, the finance company is permitted to repossess the car.

Paying Debts In Chapter 13 bankruptcy

Typically, a person may file for chapter 13 protection to save a house from foreclosure, and/or to pay back a portion of their debt owed to unsecured creditors because they do not meet the chapter 7 criteria.

The debtor creates a plan which requires monthly trustee payments. The plan and the trustee’s disbursements to creditors are based on the following: bankruptcy laws, debtor’s intentions,  debtor’s household’s income and expenses, the value of the debtor’s personal property and real estate.

In addition to the monthly trustee payments, the debtor must make monthly mortgage payments if they own a home that they want to keep. If they own a home that will be surrendered, no mortgage payments must be made.

Basically, the same process applies to automobile financing or a leased vehicle. However, the chapter 13 laws allow additional options regarding the payment of future monthly vehicle finance payments. For example, suppose an automobile was purchased during a certain period prior to the bankruptcy filing. In that case, the court may allow the debtor to keep the car by only paying back the amount of money that is equal to the value of the car. In this scenario, the balance due on the loan, in excess of the value, is typically eliminated.

The monthly trustee payments may include funds to be paid to the unsecured creditors. Any portion of the unsecured debt that is not paid by the trustee is permanently eliminated, with few exceptions. One such exception is student loans.

The Bottom Line

The decision as to whether chapter 13 or chapter 7 is appropriate is based on a person’s financial situation, their intentions, and if they meet the criteria for each chapter.

If someone wants to eliminate unsecured debt and meets the chapter 7 criteria, they would file a chapter 7 and eliminate their debt without making any trustee payments. However, if a person does not meet the criteria, they may wish to file a chapter 13 case, which may allow the debtor to pay back only a portion of their unsecured debt.

Also, someone that meets the chapter 7 criteria, may wish to file a chapter 13 case for the purpose of saving a house from foreclosure. Chapter 13 may also eliminate all unsecured debt, in addition to allowing one to save their house from foreclosure. 

You can request a no-fee consultation with a bankruptcy attorney, who will advise you of your options.