Which is better a Chapter 7 or Chapter 13 bankruptcy?
Jun 30, 2020
At our law firm we often get asked this question: What is better a Chapter 7 or Chapter 13? As with many legal questions, the answer to which is better is that “it depends.” However, knowing the difference between the two types of bankruptcy is key. Learn more below about the variations between the two processes and their pros and cons.
Depending on your circumstances, a Chapter 7 bankruptcy may be right for you. For a great majority of debtors seeking debt relief, a Chapter 7 bankruptcy is the right choice. In a Chapter 7 bankruptcy many who file for bankruptcy keep all or most of their property, meaning they do not have to pay their creditors, unlike a Chapter 13 where one must make payments for three to five years.
While a Chapter 7 bankruptcy sounds appealing, it is not the best solution for everyone. Moreover, not everyone qualifies for Chapter 7 and in other cases, Chapter 7 does not offer the kind of help the debtor needs. Below is a list of Chapter 7 bankruptcy pros:
Most of your debts are wiped out – but not all.
- Debts like recent taxes, student loans and unpaid child support do not get wiped out. Your attorney can fill you in on the details.
- You mostly get to protect your property as Chapter 7 bankruptcy lets you keep just about everything you own, unless you are flush with luxury goods.
- Chapter 7 is quick and efficient, taking three to six months to complete compared to three to five years.
- Chapter 7 does not have a payment plan like Chapter 13.
- In some situations, you get to keep your house or car provided your payments are current and you will be able to continue the payments after declaring bankruptcy. You may also be able to exempt the amount of equity you have in your property.
Who does Chapter 7 work for?
Typically Chapter 7 works well for many people, particularly those who:
- Do not have much in the way of property
- Whose family income is not greater than the state median for that family size
- Have credit card balances, personal loans and medical expenses (these are wiped out in a Chapter 7 bankruptcy)
If your income is under the average income for a family of the same size in Pennsylvania, you qualify automatically. If your income is higher than the median, you do have another chance to qualify for a Chapter 7 bankruptcy by subtracting allowable expenses. However, once the allowed expenses are subtracted and you still have income left over, also known as disposable income, to pay creditors, you do not qualify for a Chapter 7 bankruptcy. Disposable income is what is left after taking away allowed bankruptcy expenses from your monthly income. Those deductions include but are not limited to:
- Childcare costs
- Health care expenses
- Life insurance
- Transportation expenses
- Certain education costs
- Involuntary payroll deductions
- Court-ordered payments (like family support)
What to know about Chapter 13
As we mentioned above, Chapter 7 will not help those with student loans, some income tax debt and support payments. Additionally, those whose income is higher than the median average in the state and have disposable income left over will find it hard to quality for a Chapter 7 bankruptcy. For these reasons, a Chapter 13 might be a better option.
Debtors who do not want to lose home equity or other property should consider a Chapter 13 because they would then not have to deal with repossession or foreclosure.
However, the most important thing to remember about a Chapter 13 bankruptcy is that you must repay your debts using your disposable income. This is done through a payment plan over a three to five year period.
You need to calculate your disposable income for a Chapter 13 bankruptcy. The disposable income is the amount that remains after deducting allowable expenses. Disposable income is used to pay unsecured, non-priority creditors every month.
In a Chapter 13 bankruptcy filing the following requirements need to be met:
- You must finish the entire period of your repayment plan, whether it is three or five years, prior to being able to get qualifying debt balances wiped out. If there is some hardship that interferes in the payment plan process while you are paying down your debt, the court may take that into consideration.
- If you happen to owe things like support or overdue taxes, the entire balance must be paid off in your plan.
- If you want to keep your car or house, you need to bring current those debts over the three to five year plan while continuing to pay your regular monthly payment(s).
Large number of people who file for a Chapter 13 bankruptcy, do not complete their payment plans. Not completing the plan means the debtor runs the risk of their debts not being discharged.
Filing for bankruptcy is challenging and fraught with questions. The bankruptcy process has many rules and regulations that are not always clear. This is why, no matter what Chapter of bankruptcy you choose, it is best to consult with an experienced bankruptcy attorney. At Melaragno, Placidi & Parini we are here to help you make the right choice. Give Melaragno, Placidi & Parini a call as soon as possible. We offer a free consultation and can help you file for bankruptcy even during quarantine. Let us help you get your life back on track.