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How to Decide Between a Chapter 7 and Chapter 13 Bankruptcy Filing

On Behalf of | Sep 10, 2020 | Bankruptcy

If you are facing large amounts of debt and aren’t sure what the best course of action is for alleviating that debt, meeting with a skilled Iowa bankruptcy attorney may be a smart option. A bankruptcy attorney can help you to understand your options for debt relief, including things like debt consolidation and mortgage refinancing. If bankruptcy proves to be your best option, though, an attorney can also help you to decide between filing for a Chapter 7 or a Chapter 13 bankruptcy. Here’s an overview of what you should know–

What Is a Chapter 7 Bankruptcy?

A Chapter 7 bankruptcy is one of the most common bankruptcy types that is filed by individuals. Also known as a liquidation bankruptcy, a Chapter 7 bankruptcy is designed for those who cannot afford to pay their unsecured debts, such as credit card and medical debt.  Chapter 7 bankruptcies differ significantly from Chapter 13 bankruptcies in that in this type of bankruptcy, non-exempt property may be sold in order to pay creditors.   Also, foreclosure and repossession may be stopped or delayed by filing a Chapter 7 bankruptcy.

What Is a Chapter 13 Bankruptcy?

Like a Chapter 7 bankruptcy, filing for a Chapter 13 bankruptcy is very common amongst individuals. Unlike a Chapter 7 bankruptcy, though, a Chapter 13 bankruptcy is not a “liquidation bankruptcy”; instead, it is a reorganization bankruptcy that incorporates a repayment plan. Under a Chapter 13 bankruptcy, a debtor’s debts will not immediately be discharged – they will be discharged three to five years after the bankruptcy filing has occurred and the debtor has completed their repayment plan. While debtors will need to enter into a repayment plan under this type of bankruptcy, Chapter 13 is often advantageous in certain circumstances.

Factors to Consider When Determining Which Bankruptcy Type to File

Just considering the facts about both types of bankruptcy above may not give a debtor enough information about which bankruptcy type to file, especially considering that both options provide a form of substantial debt relief and both options will initiate the automatic stay – an immediate pause on collections while the bankruptcy case is pending. However, both Chapter 13 and Chapter 7 have unique eligibility requirements to consider, including:

  • The means test. In order to be eligible to file for a Chapter 7 bankruptcy, a person must pass the means test. This is one way the Court analyzes your income. In order to pass the means test, a debtor must have a current monthly income that is less than their state’s median income based on household size. If their monthly income is equal to or greater than the state monthly median income, they may still pass the test if they do not have enough disposable income to pay off a portion of their debts.
  • Value of debt. If you are thinking that a Chapter 13 bankruptcy might be the right choice for you, you’ll need to think about the amount of your unsecured and secured debts. In order to qualify for a Chapter 13 bankruptcy, a person may have no more than $394,725 in unsecured debts (like credit card debt) and no more than $1,184,200 in secured debts (like a car loan or house payment).

How Our Iowa Bankruptcy Lawyers Can Help

If you are thinking about filing for bankruptcy, our experienced Iowa bankruptcy lawyers at the Telpner Peterson Law Firm, LLP can help. Please reach out to us directly today for a consultation about your options.