Chapter 7 vs Chapter 13 Bankruptcy: What’s the Difference?
There are two types of bankruptcies available to individuals and married couples. Understanding the differences between a Chapter 7 and Chapter 13 bankruptcy can help you balance your needs, your assets, and your timelines and make a choice that works best for you and your family.
What is a Chapter 7 Bankruptcy?
A Chapter 7 bankruptcy is a petition filed in federal court which:
- Puts a halt to current collections efforts
- Sells off any non-exempt property you own
- Distributes the proceeds among your creditors
- Discharges most or all your remaining debt
Think of a Chapter 7 Bankruptcy like dividing up a pie among a table full of hungry guests. Bankruptcy petitioners are allowed to carve out certain protected assets as their own (they get their own slice of pie). Then it is the bankruptcy trustee’s job to slice up what is left and share it around the table. None of the family members will get as much pie as they want, but they will sometimes get something. In the vast majority of cases, however, creditors get nothing because the exemption statutes are quite liberal. But by law, their appetites must be satisfied with whatever slice of pie they get. Unless the debt is “nondischargeable” (such as student loans or unpaid child support or alimony), creditors are not allowed to come back for seconds after the bankruptcy has been discharged.
What is a Chapter 13 Payment Plan?
- Stops collections efforts
- Dedicates your disposable income to paying down your debts for three to five years
- Distributes those payments among your creditors
- Discharges anything still owed upon completion of the payment plan
If a Chapter 7 bankruptcy is a pie, a Chapter 13 bankruptcy is more like a stew. Your bankruptcy petition is a promise that you will keep adding ingredients (your disposable income) into the pot and the trustee will ladle out the resulting stew to creditors for as long as the payment plan is active. Creditors can receive seconds, thirds, even 36th helpings from the stew pot, but their bowl will likely not be as full as they like on any given serving. When the payment plan is complete, the kitchen closes, and the unsecured creditors are cut off from getting any more stew from you. If they are still hungry, they will have to accept whatever they have already received.
Choosing Between a Chapter 7 and Chapter 13 Bankruptcy
So which is better: a Chapter 7 or Chapter 13 bankruptcy? Choosing the right type of bankruptcy for your family will depend on how much you earn, how much you owe, what kind of debt you have, and whether you can commit for the length of the payment plan.
Does Your Income Qualify?
Not everyone can file for a Chapter 7 bankruptcy. In order to file, you must qualify based on the Connecticut bankruptcy means test. The means test doesn’t apply if:
- Your income is below the Connecticut median (midpoint) for a household your size (the statewide Connecticut median household income was $137,128.00 for a family of four as of May 15, 2022, it’s rarely been easier to qualify)
- You are a disabled veteran and incurred your debt while on active duty or homeland defensive duty
- Your debt is not primarily consumer debt
- Your monthly income minus your allowed expenses is below the means test threshold
Chapter 13 also has an income requirement, but it functions differently. You must have sufficient income to pay for all your necessary expenses, mandatory payments to priority creditors, a minimum threshold of payments to unsecured creditors, and a commission to the bankruptcy trustee.
What are You Trying to Protect?
Next, you must consider what you have to lose in filing for bankruptcy. Remember, a Chapter 7 bankruptcy trustee will sell all your non-exempt property to satisfy your debts. In Chapter 13, you keep all your property as long as you make your monthly bankruptcy payments. Many Connecticut families can use the federal or Connecticut property exemptions to shield all their assets from their creditors. However, if you own a second home, expensive cars, or other non-exempt property, a Chapter 13 bankruptcy will help you protect these non-essential assets.
What Debts are You Trying to Discharge?
Not all debts are dischargeable in bankruptcy. Even after you complete your Chapter 7 bankruptcy petition, you will still owe:
- Secured debt, like mortgages and car loans
- Student loans
- Unpaid child support and alimony payments
- Some tax debts
- Personal injury payments
- Criminal fines, penalties and restitution
- Certain other nondischargeable debts
However, some of these debts are dischargeable in a Chapter 13 bankruptcy. Others can be included in your payment plan, reducing the amount you must pay to your other unsecured creditors. Talk to your bankruptcy attorney about how much you owe, and to whom, to see if you have debts dischargeable in a Chapter 13 bankruptcy but not a Chapter 7 bankruptcy.
Chapter 13 bankruptcies offer many advantages which are often overlooked. Unlike debt consolidation plans, most creditors do not actively participate, and they are all bound by the terms of the plan once the bankruptcy court determines it complies with the law. On the other hand, chapter 13 is always completely voluntary on your part. Things change, and the law recognizes that. If there are major life events that make the plan unworkable for you, then you have the right to voluntarily dismiss your case.
At Lawrence & Jurkiewicz, we focus our practice on helping people. We know one size doesn’t fit all when it comes to bankruptcy. We will meet with you to review your financial circumstances and help you decide whether to file for a Chapter 7 or Chapter 13 bankruptcy. We want to help you make the right decision for you and your family. Please call (860) 264-1551 or contact us for a free consultation.