Chapter 7 vs. Chapter 13 Bankruptcy: Which is Best?

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Bankruptcy is meant to give consumers who are struggling with debt a fresh start.  Chapter 7 bankruptcy in a debt liquidation plan while Chapter 13 bankruptcy is a debt reorganization plan.  Whether to file Chapter 7 vs. Chapter 13 bankruptcy depends of the debtor’s income and the types of debts he has. 

Chapter 7 Bankruptcy

Chapter 7 bankruptcy, also known as “no asset” bankruptcy, is ideal for debtors who own few if any assets, whose assets have little or no equity, and whose debts are primarily unsecured.  Chapter 7 bankruptcy allows a debtor to eliminate most unsecured debts, including: 

  • Credit cards;
  • Medical bills;
  • Personal loans; and
  • Certain taxes. 

Some debts are not dischargeable in a Chapter 7 case.  They include: 

  • Domestic support obligations;
  • Student loans;
  • Court ordered restitution and fines;
  • Sales and withholding taxes; and
  • Debts incurred in connection with a DUI/DWI.

To qualify to file a Chapter 7 case, a debtor must satisfy either the median income or means tests.  If a debtor is unable to pass either of these tests, he is ineligible for Chapter 7 relief and, therefore, must file a Chapter 13. 

Chapter 13

Chapter 13 bankruptcy allows a debtor to restructure his debts and repay them over a three to five year period.  Chapter 13 bankruptcy is best for debtors with substantial assets or whose assets have substantial equity. 

To qualify for Chapter 13 relief, a debtor must have sufficient income to make the payments required by his Chapter 13 plan.  Additionally, the debtor’s liquidated unsecured debts may not exceed $336,900 and his secured debts may not exceed $1,015,650. 

Filing Requirements

All Chapter 7 and Chapter 13 debtors must complete a pre-bankruptcy counseling class within 180 days of the date the bankruptcy petition is filed.  The certificate of completion must be filed along with the bankruptcy petition and schedules.  Additionally all Chapter 7 and Chapter 13 debtors must file paystubs or payment advices for the 60 day period preceding the filing of the bankruptcy petition. 

All debtors must also pay a filing fee.  The filing fee for Chapter 7 cases is $299; the filing fee for Chapter 13 cases is $284.  Upon approval of the court, the filing fee may be paid in installments. 

Discharge

All Chapter 7 and Chapter 13 debtors must complete a pre-discharge counseling class in order to receive a discharge.  The certificate of completion must be filed with the court before a discharge will be granted.  Most Chapter 7 debtors receive a discharge within about 90 days of filing bankruptcy.  Chapter 13 debtors receive a discharge upon successful completion of the Chapter 13 plan, usually within three to five years of filing bankruptcy. 

Getting Legal Help

In exchange for the fresh start afforded by bankruptcy, debtors are expected to strictly follow the bankruptcy rules and laws.  By hiring a bankruptcy attorney, you ensure that your petition and schedules are properly completed and filed and that all rules and requirements are met, thus, significantly improving your chance of receiving a discharge.

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