The term “bankruptcy” has taken on a negative connotation. Many individuals feel ashamed to admit that they need help re-establishing secure financial wellbeing. Due to the taboo nature of bankruptcy, there are some misconceptions and confusion surrounding chapter 7 and chapter 13 bankruptcy. If you are currently considering using bankruptcy to solve your financial troubles but are unsure whether your situation calls for a chapter 7 or chapter 13 bankruptcy, the team at Alison Grant, Attorney at Law, can help.
We are dedicated to educating our clients and community to help empower them to make decisions about this stressful topic. Here is what you need to know about the differences between chapter 7 and chapter 13 bankruptcy.
What Is Chapter 7 Bankruptcy?
Also known as a liquidation or straight bankruptcy, chapter 7 bankruptcy allows an individual to ask a bankruptcy court to wipe out most of their debt so they can get a fresh start. During this type of bankruptcy, a judge reviews the case and decides whether or not the situation warrants a chapter 7 bankruptcy.
If the judge approves the bankruptcy, the court will issue an “automatic temporary stay” that stops creditors from collecting payment or taking action, such as garnishing wages, against the debtor while their bankruptcy case is pending. By doing this, the court provides temporary immediate relief to the debtor, allowing them time to get back on their feet.
There are some things you need to keep in mind though when pursuing a chapter 7 bankruptcy:
- Filing for chapter 7 bankruptcy will drastically lower your credit score, an effect that lasts many years.
- Non-exempt assets can potentially be sold or liquidated to repay creditors.
- Student loans, tax debt, and other types of secured debt are not “dischargeable” and will still need to be repaid.
What Is Chapter 13 Bankruptcy?
Also known as a wage earner’s plan, chapter 13 bankruptcy provides individuals with a regular income and a plan to repay all or part of their debts. Under this chapter of bankruptcy, debtors propose a plan in which they make installments to creditors over a three- to five-year period. The expected payment amount for each installment depends on how much you earn, how much debt you owe, and how much property you own.
Chapter 13 bankruptcy usually applies to debtors who do not qualify for chapter 7 but need debt relief to lower debt payments, stop litigation, or prevent wage garnishment. Chapter 13 also generally applies to individuals who have nondischargeable debts such as alimony or child support payments that they would like to pay off over three to five years. It also can apply to individuals who have fallen behind on their house or car payments but want the opportunity to catch up on missed payments and not lose the property.
Who Qualifies for Chapter 7 Bankruptcy?
To find out if an individual qualifies for chapter 7 bankruptcy, they will have to take the two-part chapter 7 means test. If the individual’s income or their household income is lower than the median household income of the state they live in, they’ll pass. The current average household income in the state of Texas is $63,826.
The second part of the test allows individuals to subtract some of their monthly expenses from their income. If the remaining balance is not enough to cover a meaningful payment to the creditors, they qualify for chapter 7 and not chapter 13.
Who Qualifies for Chapter 13 Bankruptcy?
As mentioned earlier, chapter 13 bankruptcy typically applies to individuals or households that do not meet the requirements for chapter 7 but still need financial relief from their debts. Instead of discharging the debt, chapter 13 reorganizes it through a repayment plan designed specifically for the debtor’s case.
Will I Lose Property With a Chapter 7 Bankruptcy?
Depending on what state you live in and the situation surrounding your case, we will analyze your case and choose either the federal bankruptcy exemptions or our state’s exemption laws. Here are the properties covered by Texas’ State Exemptions:
- Home Equity: Texas has an unlimited homestead exemption which means that houses on properties less than 10 acres near a city or located on 100 acres of land are 100% exempt. This includes improvements to the home, such as adding a swimming pool or renovating a kitchen. However, an individual must have lived in Texas for more than 1,215 days or 3.5 years for this to apply.
- Motor Vehicles: Texas state law protects motor vehicles for each licensed driver in a debtor’s household.
- Personal Property: Individuals who are filing for bankruptcy alone can exempt up to $50,000 worth of furniture, firearms, jewelry, clothing, and other personal items. For couples filing together, this value rises to $100,000.
- Retirement Accounts: An individual’s or couple’s Defined Contribution Plans, such as IRAs or 401(k)s, are 100% exempt.
How Much of My Debt Will I Have to Repay If I File for Chapter 13 Bankruptcy?
The amount you have to pay back depends on the types of debt you have. Here is an overview of the general guidelines concerning the types of debts:
- Bankruptcy Fees: Any bankruptcy filing fees, trustee commissions, and attorney fees must be 100% paid back.
- Priority Debts: Individuals have to pay 100% of the debt on the following obligations:
- Child and spousal support
- Tax debts; except those due at least three years before your bankruptcy was filed
- Wages, salaries, or commissions owed to employees up to a specific amount
- Contributions owed to an employee benefit fund
- Secured Debts: These include home or car mortgages, which you have to pay back 100%, as well as 100% of debt secured by a tax line. You also have to remain up-to-date on your monthly payments.
- Unsecured Nonpriority Debts: Depending on the amount you owe and what your disposable income looks like, you will have to repay anywhere from zero to 100 percent of your unsecured nonpriority debts. This total will also be determined by how long your repayment plan is and the total value of the nonexempt property.
Not Sure If Chapter 7 or Chapter 13 Bankruptcy Is Best for You?
Bankruptcy can be intimidating, but you don’t have to go through it alone. The dedicated bankruptcy attorney, Alison Grant, has been helping the individuals of Lewisville, Texas and the surrounding areas regain their financial independence. With her years of experience, Alison Grant, Attorney at Law, can help you find a way out of your situation. Contact our team today for more information on our bankruptcy services or to schedule a consultation.