I am often asked, what is the difference between chapter 7 and chapter 13 bankruptcy?
Chapter 7 is a type of bankruptcy in which a debtor gets a fresh start.
Chapter 13 is a type of bankruptcy in which a debtor pays all or a portion of his debt in a plan.
There are many factors which determine which type of bankruptcy is best for an individual. First, if a debtor has previously filed a chapter 7 bankruptcy, she must wait 8 years before filing another chapter 7.
Second, high income debtors may not be eligible for a chapter 7 because they may be able to afford to pay back all or some of their debt. The bankruptcy code requires that a debtor who earns more than the median level of income for his state and family size, prepare a separate budget which will determine whether he has any disposable income. This budget is called a “means” test. If, after all allowed deductions are subtracted from income, no or very little disposable income is left, the debtor can still file a chapter 7 even if he is over the median. In some cases, debtors will have “special circumstances” which make him or her eligible for chapter 7. Special circumstances could include medical problems or caring for a disabled child. There are many types of special circumstances. The means test is a very complicated, technical test and if you are over the median level of income and considering bankruptcy, please consult with an experienced attorney regarding the means test.
In every chapter 7 case, the debtor must list all of her assets and all of her debts. She may keep her assets if they are exempt under the appropriate law. Chapter 7 is usually best for those with little equity in their assets and too little income and too much unsecured debt to consolidate and pay back that debt.
In a chapter 13 bankruptcy, the debtor files a plan which provides for some repayment of his debts. The amount of the payment is determined by disposable income. If the debtor has non-exempt assets, so long as he pays back the same amount his creditors would have received had those assets been liquidated, he can keep his assets in a chapter 13.
If a debtor’s income is below the median level of income, she must make payments to a bankruptcy trustee through her plan for a minimum of three years. If the debtor’s income is over the median level of income, he must pay back a minimum of 5 years. A chapter 13 plan cannot provide for a repayment period of longer than 5 years. Both the Eastern District of Missouri and the Central District of Illinois, Springfield Division have model chapter 13 plans debtors must use.
Certain types of debts are dischargeable in chapter 13 that are not dischargeable in chapter 7. Most notably, spousal debt owed pursuant to a divorce decree is dischargeable in chapter 13. However, if the spousal debt is in the nature of alimony, maintenance or support, it must be paid in full in a chapter 13 plan.
Another reason debtors file chapter 13 is the 8 year time limit between chapter 7 bankruptcies. A debtor may file a chapter 13 within 4 years of a chapter 7 filing. A debtor may file a second chapter 13 within 2 years of a previous chapter 13 filing. A debtor may file chapter 7 within 6 years of a previous chapter 13 filing. These time limits pertain to discharge and other options may be available if discharge is not the only goal.
If you are considering bankruptcy, you should speak with an attorney that handles both chapter 7 and chapter 13 bankruptcies.