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Chapter 7 vs. Chapter 13 Bankruptcy: Which Is Right for You?

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Julie O'Bryan  |  10-23-18 | 2:19pm

If you've been considering personal bankruptcy, you've probably wondered about the benefits and drawbacks of Chapter 7 vs. Chapter 13. The truth is, comparing the two types of bankruptcy is like comparing apples and oranges. They differ significantly and exist for different reasons. 

So what makes them different?

Our goal in this article is to answer your questions about Chapter 7 vs. Chapter 13 and help you decide which is right for you. A Kentucky bankruptcy attorney at O'Bryan Law Offices can help you make an informed decision. Contact us today to learn more. 

When to File Chapter 7 Bankruptcy

The "chapter" names involved in bankruptcy proceedings come from the chapters where they appear in the federal bankruptcy legal code. Chapter 7 is also called "liquidation bankruptcy." The goal is to discharge unsecured debt that has grown beyond your control. This can include medical bills, credit cards debt, unsecured loans, and sometimes more.

Usually, you can only file Chapter 7 when you're at or near rock bottom financially. In other words, Chapter 7 comes into play when can barely cover your living expenses — if that much. This determination is based on median income and IRS minimums that vary from year to year and state to state. It also takes into account the number of people in your household. If you've made less than the monthly state median income for the past six months and meet other requirements, you can file for Chapter 7.

The means-test requirements are nearly identical for Kentucky and Indiana, the states where we work. 

What If You Make Too Much Money?

You might still qualify for Chapter 7, depending on your expenses and whether your upcoming income for the next 60 months is less than your state's median income for your family size.

If you’re not sure you qualify, please speak to a bankruptcy attorney. We stay up-to-date on Kentuckiana median incomes for all family sizes and can walk you through the means tests.

What Happens After Filing Chapter 7?

Once you file Chapter 7, a ruling called an "automatic stay" goes into effect. This temporarily bars most (but not all) creditors from collection activity and will protect your house from foreclosure (if needed) until the lender can get a motion to lift the stay.

The court will appoint a trustee to handle your case. The trustee will then sell off any non-exempt property you may have to pay off your creditors. You have no choice in the matter, but many people who qualify for Chapter 7 have no non-exempt property. If that's true for you, the court will discharge your unsecured debt without payment.

However, there are some unsecured debts you cannot discharge. These include:

  • Alimony
  • Child support
  • Many student loans
  • Most tax payments
  • Fines assessed by the authorities

Just remember: anything you want to keep, you have to keep paying for.

When to File Chapter 13 Bankruptcy

In the Chapter 7 vs. Chapter 13 game, Chapter 13 is where you go when you can't qualify for Chapter 7 but still need debt relief. Basically, it lets you reorganize your finances so you can pay off your debts over a period of 3-5 years. Your Chapter 13 trustee oversees how your payment plan is administered.

Chapter 13 bonuses include the ability to catch up on late home mortgage payments and to strip away unsecured "junior" liens on your property, including extra mortgages. You may also be able to decrease the principle on secured debts in a process called a "cramdown."

You keep all your property with Chapter 13, which might not be true with Chapter 7. This assumes, of course, you keep up with your bankruptcy payments and your mortgage and other payments. You can still lose your home or car if you fail to meet a payment.

Debt Limits for Chapter 13

Chapter 13 has debt limits, based on Federal rules: no more than $394,725 of unsecured debt or $1,184,200 of secured debt as of 2018. You also have to pay an amount equal to the value of your non-exempt assets to your unsecured creditors.

Plus, your debt goes away only when you complete your payment plan, which takes years.

Chapter 7 vs. Chapter 13? We Can Help You Decide the Best Option for Your Situation

If you live in the Kentuckiana region, contact us for a free consultation. Remember: while bankruptcy is a federal matter, the rules can differ slightly based on whether you live in Kentucky or Indiana.

Bankruptcy gives you an opportunity to start fresh. Contact O'Bryan Law Offices to discuss the benefits, bonuses, and requirements of filing Chapter 7 vs. Chapter 13.


Contact O'Bryan Law Offices Today