Bankruptcy

Chapter 7 vs Chapter 13 Bankruptcy

What is the difference between an Arkansas Chapter 7 and a Chapter 13 Bankruptcy? The answer is it truly depends on what you mean with that question. For some people, the difference may not be that significant. For others, it will make a world of difference.

General Differences between Chapter 7 and Chapter 13.

First, in order to filed Chapter 7 you must past the “means test.” The means test is simply a formula that is used to determine if you qualify for a Chapter 7 Bankruptcy. If you can’t pass the means test, then you must file Chapter 13.

The means test is based on calculating your disposable income. If you fall below a certain level of income, then you don’t have to take the means test. That table is below:

(As of November 1, 2017)

1 Person Family $41,164
2 Person Family $50,594
3 Person Family $57,426
4 Person Family $69,807

If you have more than 4 people in your family, add $8,400 for every additional family member.

One helpful way to distinguish the two types of bankruptcy in your mind is to think “liquidation” versus “reorganization.” Chapter 7 is called liquidation. If you’re filing for a Chapter 7, you’re in a financial situation that is desperate and you’re not in a position to honor your obligations at all and, generally, you don’t get to keep your stuff. If you have non-exempt property, then the Trustee can sell your property. This doesn’t happen for most people that file Chapter 7, but it can happen.

Chapter 13 is called reorganization. It is for people who want to keep (at least) some of their assets and can continue to pay something on them. They just can’t pay the full amount. You get to keep exempt and non-exempt property, but you have to make payment for 3 to 5 years.

Here is a list of more specific differences and similarities between the two primary types of bankruptcy:

How long does a bankruptcy take?

Chapter 7 takes 3 to 5 months.
Chapter 13 takes 3 to 5 years.

What happens to my property in bankruptcy?

Chapter 7 – The trustee can sell nonexempt property to pay creditors.
Chapter 13 – You can keep all your property, but you must pay creditors according to your disposable income.

How much do I have to pay back in bankruptcy?

Chapter 7 – None. However, if you want to keep secured property (house or car), then you have to reaffirm the debt and will have to pay back the full amount owed on that property.
Chapter 13 – It depends. You will have to pay back the full amount on your house, and the market rate and market interest on your car. So, if you owe $25k at 12% on your car and it’s worth $15k and the market interest is 5.5%, if you file Chapter 13, then you will only owe $15k at 5.5%. You will also have to pay up to your disposable income back. After you pay your house and car, that may be $0.00.

What happens to my Child Support, Alimony, Student Loans?

Chapter 7 – Your debts will not be discharged. You cannot avoid support debts through Chapter 7 bankruptcy.
Chapter 13 – If you cannot pay these off by the end of Chapter 13 bankruptcy, you will still owe the remaining balance even after bankruptcy is over.

What happens to debt from a Divorce, Property Settlement or Agreement other than child support or alimony?

Chapter 7 – If a creditor (often the spouse) objects, then the debt will not be discharged unless you demonstrate that 1) you still will be unable to pay these debts after bankruptcy or 2) the benefit of wiping out this debt exceeds the detriment caused to the creditor.
Chapter 13 – Any remaining balance at the end of Chapter 13 bankruptcy will be erased.

What happens if someone cosigned with me during a bankruptcy?

Chapter 7 – Creditors can seek payment from your co-debtor.
Chapter 13 – Creditors cannot reach your co-debtor for the duration of your bankruptcy.

What happens if I am behind on my payments and I file for bankruptcy?

Chapter 7 – If the debt is secured, then the creditor will take it back.
Chapter 13 – You can add your arrearage (the amount you are behind) to your bankruptcy and get caught up during your bankruptcy.

Although federal law does provide guidelines that you have to meet, ultimately the decision on which type of bankruptcy to file is one for you and your lawyer to make. You need to hire someone who understands the different rules and can see how each type will affect your financial future. If you have additional questions on which type of bankruptcy is right for you, please contact us.

Request A Consultation