Is Chapter 7 or Chapter 13 Bankruptcy the Better Option for You?
Bankruptcy means different things to different people. It can be a reset button on the debts you owe today. It can also be a plan for how you will pay off what you owe without losing what you have. It all depends on whether you file under Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code. Is it better to file a Chapter 7 or 13 bankruptcy, and why?
Is it Better to File a Chapter 7 or 13 Bankruptcy?
The answer to whether it is better to file a Chapter 7 or 13 bankruptcy is, as is so often the case in law, “it depends.” The two types of bankruptcy have different eligibility requirements, structures, and processes. Ultimately, they offer two very different means to the same end: relief from debt. Which is better for you will depend on what you own, what you owe, and how much you are willing to pay into the process.
Why Many People Prefer a Chapter 13 Bankruptcy
Many people will tell you that you should absolutely file for a Chapter 13 bankruptcy if you qualify. This is most likely because a Chapter 13 repayment plan lets you keep everything you own. Many people have a strong sense of pride in the things they possess. They may have plans for their children’s college savings accounts or their own retirement and investment portfolios. In these cases, a Chapter 13 Bankruptcy might be the right strategy. It allows you to pay down your debts while keeping what is important to you.
Rather than liquidating assets you already own, a Chapter 13 bankruptcy looks forward to the future. It is a promise to put nearly everything you earn toward paying off your debt over the next three to five years. You and your bankruptcy attorney will calculate your disposable income (beyond normal living expenses), and then lay out a payment plan assigning that income to your outstanding creditors. Any balances (on dischargeable debts) still owed at the end of that period are discharged.
Chapter 13 bankruptcy may also be the better option for you if:
- You cannot pass the Chapter 7 means test
- You have received a Chapter 7 discharge in the recent past
- Your debt is primarily non-dischargeable and can be paid off during the repayment plan
- You need time to catch up on secured debts like mortgages and car loans that will survive bankruptcy
When a Chapter 7 Bankruptcy is the Better Option
Despite what “everyone says” many Chapter 13 bankruptcies fail. Life can change over 3 to 5 years, and a reasonable payment plan at the start may quickly become impossible to maintain. Texas residents who need the certainty of debt relief right away are better off filing under Chapter 7. A Chapter 7 bankruptcy can be completed in 4-6 months and discharges all your eligible debts as of that date. That means you can stop making payments on credit card accounts, medical bills, and other dischargeable debts, freeing up more money to pay off debts secured by your most important property.
The biggest drawback to a Chapter 7 bankruptcy is the liquidation. When you file a Chapter 7 bankruptcy, the trustee will use all your non-exempt assets to satisfy your creditors before discharging the remaining balances. The U.S. bankruptcy code includes exemptions for the types of property everyone needs to live:
- Your primary residence (up to a certain equity limit)
- A single vehicle
- Personal property up to a set value
- Portions of your retirement accounts
- Health aids and medical devices
- Specific sentimental jewelry
Texas state exemptions can be even more generous. However, if your assets exceed the limits of these exemptions, such as if you own a second home, a second vehicle, valuable collections, jewelry, firearms, or other meaningful property, you could be forced to sell those items to pay off your debts.
Chapter 7 bankruptcy may be the better option for you if:
- All your assets are covered by a state or federal exemption
- You don’t have the monthly income to qualify for a Chapter 13 bankruptcy
- You anticipate needing to take on new debt in the next 3 to 5 years
- You would benefit from downsizing collections or selling unnecessary property
How to Know Which is Better: Chapter 7 or Chapter 13
Ultimately, if you are considering which type of bankruptcy to file, your best option is to have a consultation with an experienced bankruptcy attorney. I’m Attorney Patrick T. Williams, and I have been guiding Houston-area debtors through bankruptcy for over 20 years. I will carefully review what you owe and to whom, along with your assets and all the exceptions that apply. Next, I will help you calculate and document all your income to see whether you meet the Chapter 7 means test or the Chapter 13 income requirements. Once we have a clear picture of your entire financial situation, I’ll tell you whether it is better to file a Chapter 7 or 13 bankruptcy. Please call me or fill out an online consultation form to get help deciding which type of bankruptcy is right for you.
