When it’s better to file Chapter 7 vs. Chapter 13. Choosing the chapter depends on what you have and intend to keep.
There are two main types of consumer bankruptcy: Chapter 7 and Chapter 13.
In a Chapter 7 bankruptcy, you ask the court to erase things like credit card debt, medical bills, and most civil judgments. The downside is that you don’t always get to keep expensive property.
In Chapter 13 bankruptcy, you’re generally allowed to keep your expensive property like a house or a luxury car. But the trade-off is your debts aren’t erased like they are in Chapter 7. Instead, you commit to a 3 to 5 year repayment plan.
When choosing between the two, your decision will usually come down to: 1) what property you have and want to keep and 2) how much longer you’re willing to be in debt.
Both chapters have benefits and tradeoffs depending on your personal situation. Chapter 7 is generally the better fit for people in need of relief. That said, choosing the right chapter matters.
This article highlights some things to consider when deciding between Chapter 7 and Chapter 13 bankruptcy.
If You Want to Keep Property. Chapter 13 is generally better if it’s important that you keep a valuable piece of property like a car or a home.
Unlike Chapter 7, Chapter 13 will allow you to keep your property by catching up on the payments and continuing to make them based on a payment plan.
This is often an attractive decision for those who own homes or rely heavily on a car.
You Aren’t Eligible for Chapter 7. Unless you fall under one of the exceptions to file Chapter 7, Chapter 13 is the default option if you make more than the median income.
In this case, the court believes that, based on the money you currently have, that you can pay off your debts through monthly payments.
If You Have A Lot of Tax Debt. If you have tax debt that can’t be erased, Chapter 13 could be an alternative to convert them over to a reduced payment plan.
If You Just Need More Time To Repay. Chapter 13 basically reduces your debt and stretches the payments out over a longer period of time.
It is an option to consider if you have a consistent income and there is a possibility that you could pay off your debt. But, being realistic is key. If you’ve defaulted on your debts before, it is important to think about whether not more time will help you catch up or simply delay the inevitable.
People sometimes file Chapter 13 for various strategic reasons like to delay a foreclosure, to have more time to sell off property or negotiate with creditors, or to spread out attorneys fees.
Chapter 13 basically buys you time to catch up on your bills that have been reduced to a more manageable amount. In other cases, some people file Chapter 13 because they honestly think they can repay their debts.
You Share Debt With Someone. If you jointly owe a debt with someone, that person is called a “codebtor.”
It it very important to know that a codebtor is still responsible for paying a debt even after you file for bankruptcy. To say it differently, your bankruptcy does not erase your codebtor’s obligation to pay the debt.
In some cases, this puts the codebtor in a tough situation because now they are responsible for all of a debt and not just their half.
Chapter 7 bankruptcy is an option to consider if you have a lot of debt, but not a lot of expensive property.
It helps erase a lot of common consumer debt as well like credit cards bills, medical bills, or utility bills, or even judgments.
In some cases, you can keep items like a house or a car if they meet certain requirements.
Chapter 7 can offer more immediate, achievable, and long-lasting relief than Chapter 13.
Below we discuss some of the advantages of Chapter 7 bankruptcy.
Relief Comes Quickly. Chapter 7 bankruptcy can get you a fresh start in as little as 3 to 4 months.
And, although it takes a few months for your debts to be fully erased, you will actually start getting relief as soon as you file because it immediately blocks all bill collectors from contacting you. This is called an “automatic stay.”
No Repayment. Chapter 7 relieves you from having to pay off most debts you owe. Unlike Chapter 13’s repayment plan, it erases your debts so that you can get a fresh start without committing to 3 to 5 more years of payments.
You Can Keep Most Property. A common misconception about Chapter 7 bankruptcy is that you get your property taken away.
Although it is true that expensive property like a home or a car can be taken, most day-to-day personal property like clothes, electronics, and petty cash are actually protected under Chapter 7 Property Exemptions.
In many cases, you can keep all or most of your property from before you filed for bankruptcy.
Sometimes You Can Keep Expensive Property. In certain cases, Chapter 7 allows you to keep expensive property like a house or a car if you’re up-to-date on the payments and can commit to staying on top of them.
The only catch is that you have to check to see if the amount of equity in the car meets the exemption requirements for your state.
It Has Consistent Results. Chapter 7 bankruptcy has a pretty high success rate in two ways: 1) most chapter 7 cases result in discharge and 2) in about 93% of cases, filers can keep the day-to-day property that they own.
Downsides of Chapter 7 and Chapter 13
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Downsides of Chapter 7 Some debts can’t be erased.This includes most student loans, child support, and mortgages.
You could lose expensive property. The court can repossess or foreclose on your property to pay off your debts.
Eligibility. You’re eligible to file for Chapter 7 if you are below the median income in your state. So, if your income is too high you might be locked into filing for Chapter 13 instead of Chapter 7.
**Most People Can’t Complete the Repayment Plan. ** Chapter 13 has about a failure rate of about 67%. This is because most people are unable to complete the 3-5 year repayment plan. Because your debts are only forgiven upon completion of the plan, most people default and end up back at square one.
An unsuccessful attempt at Chapter 13 bankruptcy can actually leave you in worse shape than before you filed. This is because the interest has continued to add up, you’ve now spent money on attorneys fees and filing fees, and you’ve inherited the seven year flag on your credit report -- all without achieving the main goal: relief.
**Your Debts Won’t Be Erased For At Least 3 More Years. ** Chapter 13 requires long-term commitment. Repayment plans can run anywhere from 3 to 5 years and your debts won’t be erased until you finish. A task that, as mentioned above, many people are unable to do. With this in mind, it’s important to be honest with yourself about whether you can actually pay off your debts if given more time or if there’s a possibility doing more harm to yourself in the long run.
**Chapter 13 Cases Aren’t Usually Successful. ** Chapter 13 has a low success rate whether or not you filed an attorney. Of the cases filed with an attorney, about 33% are successful. Of the cases filed without an attorney, only about 1% succeed.
**You’ll Likely Need to Pay an Attorney + It’s Expensive. ** Unlike Chapter 7 cases, the low success rate of Chapter 13 cases shows that it is probably a good idea to have an attorney.
The problem is that bankruptcy attorneys are expensive. On average, you could look to spend around $3,000 in attorneys fees. Although this fee can be paid over time, it is important to note that the attorney’s fees for Chapter 13 are over twice as much as Chapter 7.
Luckily, if you can’t afford a bankruptcy attorney, there are legal aid organizations and free filing services like Upsolve that can save you the $1,500 you would spend for a Chapter 7 attorney.
The people who would benefit from bankruptcy relief the most are typically better off filing for Chapter 7 if they’re eligible.
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Chapter 7 can provide immediate relief and give a better chance at long-lasting financial health in as little as 3-4 months.At the end of the 3-4 months, your debts are erased and you’re no longer obligated to pay back any of the people that you owe. If you were filing for Chapter 13, you could expect a 3 to 5 year process before your debts are discharged.
Chapter 7 gives you a fresh start by erasing the common day-to-day debt that most filers have. If you’re eligible for Chapter 7, you also likely rent your apartment or home and aren’t at risk of losing a home that you own. And, even if you did, there are some instances where Chapter 7 filers can keep homes that they own.
Chapter 7 is less costly than Chapter 13. Hiring an attorney for Chapter 13 generally costs around $3,000 compared to around $1,500 for a Chapter 7 attorney.
Paying an attorney for help with either chapter can be too costly. Luckily there are nonprofits that can help you file for Chapter 7 bankruptcy for free if you need to.
Upsolve is a nonprofit that helps low-income Americans file for bankruptcy for free. See if you qualify for our help!
Upsolve is a 501(c)(3) legal aid nonprofit that started in 2016. Our mission is to help low-income Americans in financial distress get a fresh start through Chapter 7 bankruptcy at no cost. We do this by combining the power of technology with pro bono attorneys. Spun out of Harvard Law School, our team includes lawyers, engineers, and judges. We have mission-driven funders that include the U.S. government, former Google CEO Eric Schmidt, and private charities.