Consumer bankruptcy is a type of proceeding where individuals regain control of their debt by having it either restructured or partly forgiven. The two chapters which most file for are Chapter 7 and Chapter 13. While both under the same umbrella, these two chapters function quite differently, making one a clear choice over the other for certain individuals.
Read below for a breakdown of each.
The Main Differences: An Overview
For those trying to decide which of the two bankruptcy chapters they should choose, it’s usually most helpful to see their largest areas of difference laid out side-by-side. This type of visualization allows individuals to see which category most pertains to them, in addition to seeing their overall options in a single location.
As such, we have developed a quick reference chart to help you in the initial stages of understanding the difference between these two types of bankruptcy.
| Chapter 7 Bankruptcy | Chapter 13 Bankruptcy | |
| Filing Qualifications | To file Chapter 7, you must pass a means test. If you pass this test, you must also go for credit counseling and have a 341 meeting of creditors. | Must be below the maximum debt threshold of $1,257,850 in secured debt and $419,275 in unsecured debt. |
| Repayment Options | Chapter 7, as a liquidation plan, forgives most forms of unsecured debt. This makes chapter 7 ideal for individuals with credit card debt, personal loans, and overwhelming medical bills. | Chapter 13 is designed for repayment over a 3-5 year period of time. As such, far less of your debt is forgiven in this filing. Instead, you must repay all disposable income for a chapter 3 trustee to cover your monthly payments. |
| Mortgage Payments | Because Chapter 7 is a liquidation plan, it is generally not recommended for homeowners whose primary concern is keeping their property. | Chapter 13 is ideal for those looking to stop foreclosure and have a second chance at paying the mortgage on their home. |
| Cars and other valuables | Any non-exempt asset will be liquidated by your bankruptcy trustee to help pay back your creditors | So long as you can work payments into your monthly repayment plan, you are generally allowed to keep other non-exempt assets |
| Student Loans | Cannot be discharged in Chapter 7. | Cannot be discharged in Chapter 13, however, they can be paid down as part of your overall repayment plan. |
| Credit Score Impact | This creates a long-term impact on your credit report lasting up to 10 years after filing. Often, this creates a challenge with finances later on such as securing a loan or renting with certain landlords and management companies. | This filing creates a long-term impact on your credit report of 5-7 years, depending on the length of your repayment period. Similar to Chapter 7, this could also create challenges securing financing at a later point in life. |
| Success Rate | So long as individuals meet Chapter 7 income qualifications, the filing itself is often very successful. | Many who file for Chapter 13 ultimately fail because they cannot maintain monthly payments. Missing even a single payment can default your case, thus taking you back to square one; only this time, you have accrued interest and legal fees added to your debt. |
| Speed | The quicker of the two options, Chapter 7 is often complete within several months of filing. | Bankruptcy is not complete until payments are at the end of a 3-5 year period. |
Different Chapters forgive Different Debts
While the above chart gives an overview of different types of bankruptcy proceedings and their general parameters, it fails to point out the more nuanced debt forgiveness differences between Chapter 7 and 13.
In fact, there are several types of debt that are dischargeable in Chapter 13 alone, these include the following:
- Non-criminal fines
- Certain debts from divorce (not alimony or child support)
- Loans taken out to repay recent federal taxes
- Discharge denied in a previous bankruptcy case
- Welfare repayments
While filing for bankruptcy is likely to help with these debts, it’s important to speak with a bankruptcy attorney to maximize the benefits you can receive based on your specific financial situation. This is especially important if you are in a challenging circumstance where the most troublesome debts you face are those most challenging to forgive.
Some Debts Can’t Be Discharged
Even if you work with the best bankruptcy attorney, there are some debts that won’t go away no matter how much you try. These are known as non-dischargeable debts and include the following categories:
- Tax debts
- Child Support and Alimony
- Debt caused by criminal activity
- Debt resulting from harm done to another as the result of intoxicated driving
A Note About Student Loans
As you might notice, student debt is not on the above list even though it is seen as typically non-dischargeable. The reason for this exclusion is that there are instances where student debt can be discharged, so long as certain requirements are met.
These requirements are known as the Brunner Test.
Similar to a modified means test, Brunner seeks to determine that repaying student loans would be unduly burdensome for an individual if those expenses were not forgiven. The test runs on three main principles:
- Poverty
The poverty assessment is there to show the courts that between student loans and personal expenses (utilities, food, housing), you are not able to maintain a minimal standard of living. - Persistence
The average repayment period of student loans is approximately 21 years— a significant length of time. The persistence segment of the Brunner test is there to show your adverse financial situation will persist for most, if not all, of your repayment period. This is particularly true if you still have a large outstanding balance and are over the age of 50. - Good Faith Efforts
To show good faith, you must be able to prove a history of attempting to repay your loans. This is a safeguard against individuals who may have the means to pay but are looking to evade their debt.
If you believe you meet these criteria, you and your attorney may be able to make the case to forgive your student loans. For more in-depth information on how that process might work, see our article, here.
Speaking With an Experienced Ohio Bankruptcy Lawyer
When considering Chapter 13 or Chapter 7 bankruptcy for student loans, it’s important to have an attorney by your side to help guide you through the process. Not only will this help you avoid mistakes that can hold back your case, it allows you to make the most of what exemptions the bankruptcy code has to offer.
As a bankruptcy attorney, I have worked with many individuals suffering from unmanageable debt. This has led to practice, training, and personal experience in many of the challenges and solutions faced for people who need help regaining financial control.
Need a debt consultation, we are here to help. Reach out by giving us a call at (216) 241 2510 to speak with an attorney about your case. It might help you more than you think.