Chapter 13 Bankruptcy Introduction
Chapter 13 Bankruptcy, also known as the wage earners bankruptcy, is the restructuring of a debtor's existing debt for a 3 or 5 year payment plan. Chapter 13 bankruptcy is generally for folks with a consistent income. Most of the Chapter 13 plans are 60 months, however, if a debtor is below the median income guideline for their state, they may be able to do a 36-month Chapter 13 plan payment.
When a debtor files a Chapter 13 bankruptcy they will have a monthly plan payment to make.
Here’s what a debtor may see in their monthly Chapter 13 Plan Payment:
Chapter 13 Plan Payment Example
Administration Fee
Trustee Fee
Attorney Fee
Mortgage
Auto Payment
Secured Loan Payments
Monthly Disposable Income
The total monthly amount for a debtor’s Chapter 13 monthly payment is dependent on a handful of different factors, including household income, expenses, debts, and assets. Sometimes debtors may see their monthly payments increase or decrease depending on any recent personal financial changes.
Chapter 7 Bankruptcy Introduction
Chapter 7 Bankruptcy, also known as the liquidation bankruptcy, is one of the most filed consumer bankruptcies. The entire process takes around 120 days and discharges most of a debtor's unsecured debt. Unsecured debt is any debt that does not have any collateral attached to it. For instance, a mortgage would be considered a secured debt because the home is attached to the debt. While, credit card and medical bills would be considered an unsecured debt as there is no collateral attached.
Most folks are under the impression that they may lose their car or home when they file a Chapter 7 bankruptcy, however, in most cases the debtor is able to protect both assets. A debtor can protect their assets through their state’s bankruptcy exemptions.
How to Pass the Chapter 7 Means Test
In order to file a Chapter 7 liquidation bankruptcy a debtor needs to pass the Chapter 7 means test, have primarily business debts, or be a business. The means test for Chapter 7 bankruptcy is based on; household annual gross income, household size, state of residence, and monthly disposable income.
In order for a debtor to pass the means test, their income needs to be below the median income guideline for their state and household size. The Chapter 7 income requirements do not always apply when a business or someone has business related debts is filing.
To file a Chapter 7 bankruptcy for a consumer, it will generally cost around $300-$350 for the filing fee + attorney fee. An attorney for a Chapter 7 filing can generally range from $500 - $2,300, depending on the debtor’s state of residence
Chapter 13 Bankruptcy Calculator vs. Chapter 7 Bankruptcy Calculator
When it comes time for someone to look into potentially filing a Chapter 13 or Chapter 7 Bankruptcy, one of the best routes to take is to compare the options directly. A great way to do this is by taking a bankruptcy calculator. They can take a Chapter 7 vs. Chapter 13 calculator to:
- Estimate All-in Cost for Chapter 7 and Chapter 13 Bankruptcy
- Estimate Chapter 7 Qualification
- Estimate Chapter 13 Plan Payment
- Directly Compare Pros and Cons
- Directly Compare Bankruptcy to Debt Relief Options
- Calculate Estimates and Insights Based on Debtor’s Zip Code
Should I File For Bankruptcy Quiz
There are potential costs, credit report, and duration implications of filing Chapter 13 bankruptcy vs pursuing a bankruptcy altnerative.
As such, you can take the informational should I file bankruptcy quiz below that can help you compare Chapter 13 bankruptcy vs other options. The calculator will estimate cost, duration and potential pros and cons of each option. Please note that this is for informational purposes only based on your financial data that you enter.
Benefits and Downsides of Chapter 13 Bankruptcy
The benefits and downsides of filing a Chapter 13 bankruptcy can feel endless, however, it is still important for a debtor to consider them. One of the main concerns when filing a Chapter 13 bankruptcy specifically is the cost. Depending on the debtor’s income and expenses, the monthly plan payment can be quite high. You can also employ certain tips to help you succeed in a Chapter 13 bankruptcy.
However, I will lay out some of the other pros and cons here:
Pros
Protection of Assets
Provides Debt Relief
Automatic Stay Grants Legal Protection Against Creditors
Stops Wage Garnishment
Potential Help With Arrears
Cons
More Expensive Than Chapter 7
Can Last Up To 5 Years
Remains On Credit Report For 7 Years
Limited Opportunity to Credit During and After Filing
High Impact to Credit Score
Benefits and Downsides of Chapter 7 Bankruptcy
Similar to Chapter 13 bankruptcy, Chapter 7 has its own pros and cons attached. While filing a Chapter 7 bankruptcy can be one of the least expensive options, the debtor’s assets are still at risk for liquidation. Here are some of the benefits and downsides of filing a Chapter 7 bankruptcy:
Pros
Generally Least Expensive Option
Discharged After ~ 120 Days
Protection From Wage Garnishment and Lawsuits
Can Often Keep Car and Home using Bankruptcy Exemptions
Often Discharges Credit Card Debt, Medical Bills, Personal Loans, etc.
Cons
Remains on Credit Report for 10 Years
High Impact to Credit Score
Limited Opportunity to Credit After Discharge
Your Car and Home May Be at Risk If Equity Above Bankruptcy Exemptions
What to Consider When Deciding Between Chapter 13 and Chapter 7 Bankruptcy
As it’s clear that there are numerous pros and cons to both Chapter 13 and Chapter 7 bankruptcy, there are factors to consider when deciding between each option. Let’s start with why someone may want to go through a Chapter 7 liquidation bankruptcy over a Chapter 13 bankruptcy.
Filing a Chapter 7 Bankruptcy Instead of Chapter 13 Bankruptcy
Let’s say a debtor qualifies for Chapter 7 bankruptcy, is up to date on their auto and mortgage loan and has less equity in their home than the bankruptcy homestead exemption for their state. In this case, they should be able to protect both their car and home so the incentive to file a Chapter 13 is depleted. In this case, the debtor could most likely file a Chapter 7 and have the same outcome as they would in a 3 or 5 year Chapter 13 bankruptcy.
What if the Debtor is Above the Median Income Guideline?
Oftentimes, debtors who are looking to file bankruptcy prefer to file a Chapter 7 over a Chapter 13 bankruptcy due to the low cost and short term-length. However, sometimes a debtor may fall just above the income guideline needed to qualify. Unfortunately, there are times where an attorney does not go into enough detail about the means test and pushes someone into a Chapter 13 when they may not need to be.
If a debtor is just over the income guideline, there are often times when they can still qualify as their monthly disposable income may allow them to qualify. There are two parts of the Chapter 7 means test:
- The first part of the means test looks at the debtor's annual gross household income.
- The second part of the means test looks at the debtor's monthly disposable income.
Filing a Chapter 13 Bankruptcy Instead of Chapter 7 Bankruptcy
While filing a Chapter 7 can be a popular preference among bankruptcy filers, sometimes it may not be an option. If a debtor does not qualify for Chapter 7 and they still want to file a bankruptcy, then they would most likely need to file a Chapter 13 instead. However, there are times when someone qualifies for Chapter 7 but still ends up filing a Chapter 13, let’s dive into that.
Let’s say a debtor qualifies for Chapter 7 but has 3 months in arrears on their mortgage. Regardless of the equity they have in their home, it would be very difficult to protect their home in a Chapter 7 since they are behind. In this case, they would need to either get caught up on their mortgage to protect in a Chapter 7, or utilize a Chapter 13 bankruptcy to help get caught up the mortgage. The logic is the same for an auto loan.
Factors to Consider
To paint a better picture of the factors to consider when choosing between either Chapter 13 or Chapter 7, here are some things to look for:
Income Guidelines
A debtor needs to qualify for Chapter 7, if they are above the Chapter 7 income limits, it may need to file a Chapter 13 bankruptcy or look into alternatives to bankruptcy. If a debtor is above the income limit and doesn’t have enough disposable income to pay the minimums on their unsecured debts, they may be able to file above-median.
Protection of Assets
Filing a Chapter 7 bankruptcy instead of a Chapter 13 may be a preference for a lot of folks, however, it’s important to make sure that their assets would be protected in the bankruptcy. If their assets are worth more than the bankruptcy exemptions, that assets may be at risk.
Arrears
If a debtor is behind on their mortgage payments or auto loans, Chapter 7 may not be able to provide the assistance they need. A Chapter 13 bankruptcy can help debtors get caught up on their arrears and help stop foreclosures. A debtor can also utilize a Chapter 13 bankruptcy to extend the life of their auto payments to help lower the payment.
Alternatives to Chapter 13 and Chapter 7 Bankruptcy
While bankruptcy can be a great option for some folks, there are alternatives to bankruptcy that can often provide the relief needed. Debt settlement, debt management and debt consolidation are three main alternatives that debtors look into when deciding what to do.
Debt Settlement vs. Chapter 13 Bankruptcy
Debt settlement is the process of settling the total amount of debt owed down around 50%. Debt settlement is often compared to Chapter 13 bankruptcy. Depending on the debtors income, their Chapter 13 bankruptcy may be quite expensive and time consuming. Debt settlement can sometimes be a great option for those individuals, as they can get out of debt in less time and have potential significant savings.
There are downsides to debt settlement, which debt settlement companies don’t often spend too much time on. When a debtor enrolls in a debt settlement program, they are asked to fall behind on all of the accounts wanting to be settled (if they are not behind already). The reason is because the debt relief companies need leverage to negotiate with the creditors and will likely not be able to settle if the debtor is still making payments to the creditor. One main downside, which is why a lot of debtors steer clear of this option, is the potential risk of a lawsuit. A debtor does not get full legal protection in a debt relief option, as they would normally in a bankruptcy. With that being said, the creditors should have full legal right to sue. Most creditors reach a settlement with the debt relief company, but it’s important for the debtor to understand their creditors likelihood to sue.
Debt Management
Debt management is similar to debt settlement, however, this option negotiates the interest rate rather than the total amount of debt owed. This can be a great option as well, but it’s important to understand the fees involved to make sure it would still be a cost-saving option.
Debt Consolidation
Debt consolidation is often a loan that can help folks get caught up on their debt and restructured into a single monthly payment. However, they can be difficult to qualify for if the debtor is already behind on the debt. If the debtor qualifies, it’s important to understand the origination fee and interest rates to make sure it would be a cost-saving option.
Conclusion
When it comes to filing a consumer bankruptcy, there are two main options a debtor looks into, Chapter 7 and Chapter 13 bankruptcy. Each bankruptcy has its own set of pros and cons, so it’s important to consider those, as well as the alternatives to bankruptcy to help make the most informed decision. If you have any remaining questions feel free to reach out to us directly at dave@chapter13bankruptcyhelp.com.
