One of the most common questions asked is whether it is better to file Chapter 7 or Chapter 13. Our firm’s position is that if you qualify for Chapter 7 and if there is little risk of your property being liquidated, then Chapter 7 is the better way to go. The goal is to complete the bankruptcy process as fast as possible, and Chapter 7 cases are completed in about 90 days whereas a Chapter 13 payment plan takes 3 to 5 years to complete. Also, Chapter 7 cases are generally about one-half to one-third of the cost of a Chapter 13 case over time, but they are more expensive in up front fees since there is no payment plan to pay the attorney fees. In Chapter 13 cases, attorney fees are typically paid out of the 3 to 5 year plan, but since Chapter 7 has no payment plan these fees are due in full before the case is filed. Generally speaking, Chapter 7 cases are faster and more dangerous because of the risk of having the bankruptcy trustee liquidate property, and Chapter 13 cases are slower but safer.
Some of the factors considered in deciding what chapter to file include:
- Income Level: If the household income is above the state median income figure for a given household size, then a person may be required to file a Chapter 13 plan. In short, if you make too much money you cannot file Chapter 7. Instead, you must repay some or all of the debt—depending on your income—in a 3 to 5 year Chapter 13 payment plan.
- Prior Bankruptcy: You cannot file a Chapter 7 case if you have filed a previous Chapter 7 case in the past eight (8) years or if you received a Chapter 13 Discharge in a cases filed in the prior six (6) years.
- Foreclosures & Repossessions: Chapter 7 cases do not stop mortgage foreclosure actions or auto repossessions, at least not for more than a few weeks. All bankruptcy cases stop creditors temporarily, but only a successful Chapter 13 payment plan can permanently stop a home foreclosure or auto repossession. So, if your home is in foreclosure or if you are behind on the mortgage payment you should only consider filing Chapter 13. Again, Chapter 13 is slower but safer.
- Equity in Property: State exemption laws protect your property from creditors, but only a limited amount of property is protected. Every state has a different amount of protected property. For example, in Nebraska $60,000 of your home equity is protected if you lived as a married person in the home or if you raised minor children in the home or if you are age 65 or older. But if you have more than $60,000 of home equity, then you could lose the home in a Chapter 7 Liquidation bankruptcy. There are similar limits to equity in your vehicle and other property. Again, Chapter 13 is safer but slower.
- Income Tax Debts: There are some advantages to paying income tax debts through a Chapter 13 Plan, including the fact that such debts are not typically paid back with interest. Discharging income tax debts is very, very complicated, and many tax debts are not fully discharged by a Chapter 7 case. Thus, the IRS may resume its collection efforts and wage levies after the Chapter 7 case is over. Chapter 13 avoid this problem by paying the nondischargeable tax debt through a payment plan. Again, Chapter 13 is slower but safer.
- Personal Preference: Many people actually want to pay their debts and prefer the orderly Chapter 13 legal system of dividing payments to creditors. Outside of bankruptcy creditors are racing each other to collect their money as fast as they can, and often one creditor gets the advantage at the expense of the others. Chapter 13 payment plans not only help the debtor get out of debt, but it organizes the payment to the creditors in a fair and equitable manner.