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Chapter 7 Vs Chapter 13 Bankruptcy: Which Is Right For You?

If you’re struggling to pay your bills and find yourself falling further and further behind, you may realize that filing for bankruptcy is the right choice. But choosing between filing for Chapter 7 and Chapter 13 may be a difficult decision, especially if you’re unfamiliar with the differences between them. To help you make the best decision for your financial future, our Florida bankruptcy lawyer is sharing an in-depth look at Chapter 7 vs Chapter 13 bankruptcy.

Table of Contents

    Which is best?

    Your decision to file for Chapter 7 or Chapter 13 bankruptcy relief should take into consideration:

    • What do you wish to accomplish by filing for bankruptcy
    • The duration of the bankruptcy process
    • The effect on your property or assets
    • Your ability to repay your debts
    • The effects on your credit

    Both Chapter 7 and Chapter 13 bankruptcy are regulated by the Federal Rules of Bankruptcy Procedure and the local rules of the bankruptcy court in which your case is filed. You must claim available exemptions, which are the same for both bankruptcies, to protect your property.

    The exemptions you use to protect your property will depend on the state where you have resided for at least 730 days immediately before you file. You may be required to use state or federal exemptions.

    Although the exemption protections are the same for both Chapter 7 and Chapter 13, what can happen to your property when you file for bankruptcy can have very different outcomes depending on which chapter you file. 

    The effects on your property and understanding how each bankruptcy deals with secured and unsecured debt is one of the most important considerations to have when comparing Chapter 7 and Chapter 13 bankruptcy.

    It’s best to consult with an attorney who understands bankruptcy law prior to taking any action.

    What Is Chapter 7 Bankruptcy?

    Chapter 7 bankruptcy is the most common bankruptcy filed in the US. It is designed to help those with no disposable income get out from under debt by providing a way to liquidate their dischargeable debts and “clean your slate” so to speak. As noted by the United States Supreme Court:

    “It gives to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.” Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934).

    Most people looking to file for bankruptcy are overwhelmed with debt and may be dealing with harassing debt collectors and possibly facing lawsuits and wage garnishments.

    By filing for Chapter 7 (or 13), most debt collection stops, including lawsuits, foreclosure, wage garnishment, and repossessions. 

    Note: The filing of bankruptcy does not stop all legal action including criminal proceedings and garnishment related to child support and student loans.

    Different than Chapter 13 bankruptcy which can only be filed by individuals, a Debtor in Chapter 7 bankruptcy can be an individual, a partnership, a corporation, or other business entity. See 11 U.S.C. section 101(41) and 109(b)

    The Role Of The Chapter 7 Trustee

    The role of a chapter 7 trustee is very different than the role of a Chapter 13 Trustee. Once you file your bankruptcy, a bankruptcy trustee is assigned to your case. A Trustee is appointed and supervised by the United States Trustee’s Office, which is part of the Department of Justice but is not a government employee. 

    The primary role of a Chapter 7 Trustee is to administer your case and liquidate your non-exempt assets. The Chapter 7 Trustee accomplishes liquidation by selling your non-exempt assets to the extent necessary to repay your creditors.

    If you refuse to hand over your assets to the Trustee, the Trustee may seek to obtain an Order from the bankruptcy judge assigned to your case compelling or forcing you to turn over the property. Although this may seem scary, most Chapter 7 filings are “no asset” cases, meaning that you either don’t own any property or all of your property is exempt (protected). 

    People filing for bankruptcy in Florida have the extra benefit that Florida has some of the strongest exemptions or protection from creditors that are used to protect your property from being liquidated or sold.

    In terms of the Trustee’s administrative role, your Chapter 7 Trustee will conduct your 341 meeting of creditors, will let you know what documents you need to provide prior to your meeting and conduct a thorough review of your assets and financial history. If everything goes smoothly, your Trustee will file a Report of No Distribution and your Chapter 7 bankruptcy will close soon thereafter.

    Read More: Florida Bankruptcy Exemptions

    Complete List Of Documents Needed To File For Bankruptcy

    Chapter 7 Qualifications

    The eligibility requirements to file for Chapter 7 bankruptcy are very different than the requirements to be eligible to file for Chapter 13 bankruptcy. You must pass the bankruptcy “means test” to be eligible to file for Chapter 7 bankruptcy. Different than in Chapter 7, you are not required to pass the means test to be eligible to file Chapter 13.

    The means test came into effect when Congress passed The Bankruptcy Abuse Protection Act of 2005 (BAPCPA). The means test seeks to determine whether individuals wanting to file Chapter 7 have enough disposable income or the “means” to pay back some of their debts. Individuals who do not pass the means test would have to file for Chapter 13 bankruptcy instead. 

    The means test requires you to compare your household income with the state median income for a family household of your size in your state. If you exceed the median income you will be required to undertake part 2 of the means test to determine if your disposable monthly income is less than the allowed guidelines.

    Read More: How To Pass The Means Test

    Pros and Cons of Chapter 7 Bankruptcy

    Benefits of Filing Chapter 7

    • A relatively quick process of four to six months to complete.
    • Stops most collection efforts, creditor harassment, wage garnishment, and lawsuits
    • Discharges or eliminates the majority of debts including credit card debt, medical bills, vehicle repossessions, and personal loans.

    Disadvantages of Filing Chapter 7

    • The Chapter 7 Trustee will seek to liquidate your non-exempt assets to repay your creditors. This can result in losing your property or assets.
    • It will not solve your issues concerning secured debt. If you are in the process of foreclosure on your home or repossession of a vehicle, the process will temporarily pause the bankruptcy, but it will continue after the finalization or sooner subject to bankruptcy court permission. 

    Different than Chapter 13, Chapter 7 bankruptcy does not have mechanisms to allow you to get current on your mortgage or other secured loans in the event you fell behind.

    What Is Generally Exempt From Chapter 7

    Florida has some of the best exemptions or protections that can be used when filing bankruptcy. Some of the best, most popular, and widely used exemptions are:

    • The Florida homestead exemption 
    • The Florida Motor Vehicle Exemptions protect up to $1000 of the equity of your vehicle. Note: Limited to one vehicle
    • The Florida Wildcard exemption protects up to $4000 per filer when the homestead exemption is not claimed. 

    Read More: Available Florida Exemptions

    How Often can you file Chapter 13 vs Chapter 7?

    It is a misconception that there is a limitation on how often or how many times you can file Chapter 13 or Chapter 7 bankruptcy. The limitation relates to how long you must wait from one bankruptcy to the next to be eligible to receive a Discharge. 

    From Chapter 7 to Chapter 13. You can be eligible to receive a discharge if more than 4 years have passed since you filed for Chapter 7 (and received a discharge). 

    From Chapter 13 to Chapter 13. You can be eligible to receive a discharge if more than 2 years have passed since you filed a prior chapter 13 bankruptcy where you received a discharge. 

    From Chapter 7 to Chapter 7. To be eligible to receive a discharge in a new Chapter 7 bankruptcy, you must wait 8 years from the date you filed your previous Chapter 7 (and received a Discharge).

    What Is Chapter 13 Bankruptcy?

    A chapter 13 bankruptcy is commonly referred to as a wage earner’s plan. Different than Chapter 7, Chapter 13 is a form of reorganization of your debt that allows you to get caught up on your debts and avoid losing your home, car, or other property. Designed for people with disposable income who may be in over their heads or behind on payments, filing for Chapter 13 requires you to take part in a three-to-five-year plan of reorganization to finalize your debts and wipe them from your record. 

    A key distinction between Chapter 13 vs Chapter 7 bankruptcy is that in Chapter 13 you can get current over a 3 or 5-year period with your mortgage, property taxes, car loan, and other secured debts. You cannot do this in Chapter 7.

    The Role Of The Chapter 13 Trustee vs Than The Role Of The Chapter 7 Trustee

    Different than the role of a Chapter 7 Trustee, your Chapter 13 Trustee will not seek to liquidate your nonexempt assets or to take any property away from you. The Chapter 13 Trustee will review your case, collect your plan payments, and make distributions to creditors in accordance with your plan. See 11 U.S.C. section 1302(b).

    Chapter 13 Qualifications 

    Different than in Chapter 7, you are not required to pass the means test to be eligible to file for Chapter 13 bankruptcy. The is no limit on how much income you make to file chapter 13. These are the requirements to be eligible to file for Chapter 13 bankruptcy, (not required in Chapter 7).

    • You need to have a regular income
    • Your secured debts cannot exceed $1,398,875
    • Your unsecured debts cannot exceed $466,275

    Chapter 13 Repayment Plan

    Different than in Chapter 7, a Chapter 13 bankruptcy requires you to present a plan of reorganization, referred to as the Chapter 13 repayment plan.

    The chapter 13 plan details how much is your monthly plan payment and instructs the Chapter 13 Trustee on how to distribute that payment amongst creditors. The court can approve or confirm your chapter 13 repayment plan based on the Chapter 13 Trustee’s recommendation or creditor’s objections.

    The court can dismiss your Chapter 13 case if you fail to remain current with your plan payments if your Chapter 13 plan is not ultimately confirmed, or upon motion by the Trustee, creditor, or another party.

    Note: A repayment plan does not necessarily mean that you will be repaying all your debts in bankruptcy. Your payment is based on your monthly disposable income and not on the amount of the debt you are seeking to eliminate. As an example, if your unsecured debts are $50,000 and your monthly disposable income is $120.00, in a confirmable 36-month plan of $120.00 per month, you would pay a total of $4320 over the 36-month period and eliminate $50,000 in debt.

    Is Chapter 13 Worth It?

    Depending on your situation, filing for Chapter 13 bankruptcy may be worth it if you have a non-exempt property and don’t want the Trustee to take it, if you are trying to save your property from foreclosure or are behind in your car payments or taxes, or if you make too much to qualify for chapter 7 bankruptcy. 

    Your bankruptcy attorney is key in advising you on which bankruptcy is best for your situation.

    Choosing Chapter 7 vs. Chapter 13 Bankruptcy

    Let’s look at who will be most likely to benefit from Chapter 7 vs. Chapter 13 bankruptcy.

    Choosing Chapter 7 Bankruptcy

    Chapter 7 bankruptcy has strict income guidelines and means testing for who can qualify that looks at expenses, family size, and income. If you qualify, consider these circumstances below to see if Chapter 7 is right for you.  

    • Your debt is primarily credit cards, medical bills, and personal loans, rather than student loans or tax debt.
    • You own little property, including investments, savings, and valuables.

    Choosing Chapter 13 Bankruptcy

    Chapter 13 may be better if the following apply: 

    • You are behind on secured debts such as your mortgage, can now afford the regular mortgage payment but need a repayment plan or time to catch up on missed payments.
    • You are seeking to reduce the interest rate on a vehicle or to cram down the loan value on personal property.
    • You have non-exempt assets that could be sold in a Chapter 7 bankruptcy to pay your debts.

    Chapter 13 Tips and Tricks

    Pro tips from Stiberman Law when filing Chapter 13 bankruptcy: 

    • Schedule your plan payment to be deducted electronically or via a wage deduction order to ensure that you always remain current. Failure to remain current will cause the dismissal of your bankruptcy case.
    • Hire a competent bankruptcy attorney familiar with the local rules and your Chapter 13 Trustee’s procedures. 
    • Don’t confuse reorganization with repayment. In most cases, you can discharge all of your debt by paying only a small percentage.

    Which Is Worse On Credit Chapter 7 or 13?

    Chapter 7 bankruptcy will remain on your credit for 10 years vs 7 years in a chapter 13 bankruptcy. Regardless of which bankruptcy you file, you will have the ability to start rebuilding your credit and get your life back on track.  

    What Do Chapter 7 and Chapter 13 Have In Common?

    Most articles discuss the differences between Chapter 7 and Chapter 13. Although very different, they do have some things in common.

    Discharging your Debts

    You can discharge the same types of debts in both Chapter 7 and Chapter 13 bankruptcy. A Discharge in bankruptcy means that you are no longer responsible or obligated to repay a certain group of debts. In both bankruptcies, you receive your discharge or Order of Discharge near the conclusion of your case. Most debts can be discharged in both bankruptcy Chapters such as:

    • Medical bills
    • Credit card debts
    • Credit card loans
    • Personal loans
    • Debts resulting from vehicle repossession or voluntary surrenders
    • Civil Judgments

    Not all debts can be discharged

    The non-dischargeable debts are also the same for both chapters. They include:

    • Alimony
    • Child Support
    • Marital Settlement Obligations
    • Debts resulting from fraud
    • Student Loans – there are some limited exceptions but obtaining a discharge is extremely rare.
    • IRS Debt – unless the tax liability falls into a specific time frame and where all filings were timely filed. 

    Read More: What Debts Are Dischargeable

    Obtain a free copy of your credit report

    Where to File your Chapter 7 or Chapter 13 bankruptcy?

    Irrespective if you file Chapter 7 or Chapter 13, you must file in the jurisdiction where you have resided for the 180-day period immediately prior to filing bankruptcy or other reason as per 28 U.S.C. section 1408.

    Schedule a Free Consultation with a Bankruptcy Lawyer in Florida 

    If you feel filing for bankruptcy is the right solution, Stiberman Law is on your side. We will discuss in detail Chapter 7 and Chapter 13 bankruptcy and recommend the best course of action. We are dedicated to helping our clients make the right decisions for their financial future and navigate the challenges of bankruptcy to achieve financial freedom. To schedule a free consultation, reach out to us today at (954) 922-2283 or fill out the form below to get started.

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