Chapter 7 vs Chapter 13
How do i decide whether chapter 7 or chapter 13 bankruptcy is best for me?
In a chapter 7 bankruptcy, you pay creditors out of non-exempt property owned at the time of filing.
In a chapter 13 bankruptcy, you keep all assets owned (even those that are not exempt under chapter 7) at the time of filing and pay creditors out of future income over 3 to 5 years.
If you are like most people, all or most of your property will be exempt from creditors. If so, chapter 7 bankruptcy is generally a simpler, less expensive, and without losing any of your property.
HOWEVER, CHAPTER 13 BANKRUPTCY MAY BE YOUR BEST OPTION IF, ONE OR MORE OF THE FOLLOWING APPLY:
- Eliminate the legal obligation to pay most or all of your debts (this is known as “discharge” of debts).
- Stop foreclosure on your house, townhome, condominium, or mobile home and allow you an opportunity to catch up on missed payments over a longer period of time.
- Prevent repossession of a car or other property, and in some instances force the creditor to return property even after it has been repossessed.
- Stop debt collection calls, letters, and other creditor harassment.
- Restore or prevent termination of utility service.
- Allow you to challenge the claims of creditors who have committed fraud or who are otherwise trying to collect more than you really owe.
- Allow you to continue occupying a rented town home or apartment for additional time.
TYPES OF BANKRUPTCY
If you’re under a crushing debt load, and your minimum debt payments exceed your monthly salary, file for bankruptcy relief in TX. Consult our attorney to determine the type of bankruptcy you should file to resolve your debt problems.
CHAPTER 7 BANKRUPTCY
Chapter 7 Bankruptcy is an orderly, court-supervised procedure by which a designated official known as a “Trustee” collects all of the person’s non-exempt property, reduces it to cash, and distributes it to creditors as required by law. The key point here is that only “non-exempt property” is collected and sold to pay off creditors. Only rarely will there be non-exempt property in a Chapter 7 case.
As such, most people keep all of their property! People who file Chapter 7 Bankruptcy typically receive discharge within just a few months of filing for bankruptcy. At that time, the person is released from any further obligation to pay all dischargeable debts. Amazingly, it is not unusual for people to eliminate literally tens of thousands of dollars or more in medical debt, credit card debt, payday loans, court judgments, debt from a failed business, personal guarantees, even certain federal income taxes over 3 years old, etc.
Important in a Chapter 7 Bankruptcy is that you will need to be current on and continue making required payments on any loan you used to purchase your home or vehicle or the like (secured loans). If not, the creditor may be able to take back the property unless you instead file a Chapter 13 Bankruptcy and repay the delinquent amounts over time.
Also, Chapter 7 may not be available for persons who have a large amount of income remaining after paying for their living expenses and payments on loans used to purchase their home or car, etc. For a more thorough explanation of Chapter 7 Bankruptcy in comparison to Chapter 13 Bankruptcy, click on Chapter 7 vs. Chapter 13
CHAPTER 11 BANKRUPTCY
Chapter 11 (reorganization which is used by wealthy persons and corporations such as K-Mart and Continental Airlines)
CHAPTER 12 BANKRUPTCY
Chapter 12 (intended for family farmers and fishermen).
CHAPTER 13 BANKRUPTCY
Chapter 13 Bankruptcy is designed for individuals with a regular source of income. Chapter 13 enables a person to pay back debt without being reChapter 13 Bankruptcyquired to sell off non-exempt assets as is required under Chapter 7 (although you can selectively “surrender” certain property which you owe more than it is worth or just simply don’t want). Instead, some or all of one’s debts are paid out of future income, after accounting for living expenses, over 3 or 5 years, based on a court approved repayment plan. The plan will not require that a person pay all of their unsecured debt over that time unless they have enough income to do so after subtracting living expenses and payments on debt secured by property they decide to keep. In fact, some Chapter 13 plans don’t provide much money, if any, to unsecured creditors such as judgment creditors, credit card companies, medical bill collectors, etc. It is not uncommon for a person to permanently eliminate literally tens of thousands of dollars of debt. Many people find Chapter 13 Bankruptcy preferable based on their situation. For a more thorough explanation of Chapter 13 Bankruptcy in comparison to Chapter 7 Bankruptcy, click on Chapter 7 vs. Chapter 13
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FAQs
Chapter 7 liquidates non-exempt assets to eliminate qualifying debts within a few months, while Chapter 13 reorganizes debt into a repayment plan over three to five years. A Chapter 7 bankruptcy attorney typically recommends this route for clients with limited income and few non-exempt assets, since it offers the fastest path to a discharge. A Chapter 13 bankruptcy attorney more often suggests reorganization for clients who have steady income, want to catch up on a mortgage, or earn too much to qualify for Chapter 7. Both paths lead to real relief, but the right fit depends on your income, assets, and goals.
The best way to know is a review of your income, expenses, assets, and the type of debt you carry, since qualifying for Chapter 7 requires passing a means test based on household income. If you want to file for bankruptcy relief in Texas and keep property that would otherwise be sold under Chapter 7, such as a second vehicle or non-exempt savings, Chapter 13 may be the better option. An honest conversation about your goals, whether that is a fast discharge or protecting specific assets, usually points toward the right Chapter.
Chapter 7 cases typically move quickly, with most discharges granted within about four months of filing, since there is no repayment plan to complete. Chapter 13 cases last longer, generally three to five years, because the process is built around a structured plan to repay some or all of the debt owed. While the timelines differ significantly, both Chapters result in the discharge of qualifying debts once the process is complete, giving you a genuine fresh start.
In some situations, yes. A case that starts as Chapter 13 can sometimes be converted to Chapter 7 if your circumstances change, such as a job loss that makes the repayment plan unaffordable. Conversion in the other direction is less common but may happen if your income increases or you no longer qualify for Chapter 7 under the means test. Discussing this possibility early with your attorney helps avoid surprises if your financial situation shifts during the case.
