When given the choice, many debtors prefer filing Chapter 7 bankruptcy because it discharges most debt. However, a debtor must qualify by meeting an income limitation. A qualified debtor may have debt discharged in exchange for giving up valuable nonexempt property for the trustee to sell to pay creditors. Even though the debtor will lose some property, there are several advantages of filing Chapter 7 bankruptcy over Chapter 13 bankruptcy.
The Advantages of Chapter 7 Bankruptcy
The debtor receives a "fresh start." The goal of Chapter 7 bankruptcy is to give the debtor a new start. The elimination of certain debt frees the debtor from personal liability for the discharged debt. However, some types of debt are not dischargeable, including student loans (unless the court rules otherwise), child support and alimony, certain taxes, and debts incurred by fraud. Certain liens on property, such as a mortgage, a tax lien, or a mechanic's lien, remain after the completion of Chapter 7 bankruptcy.
The debtor keeps future income. In general, the property a debtor acquires or will acquire after filing for Chapter 7 is not included in the bankruptcy estate. However, certain property a debtor acquires within 180 days after filing for Chapter 7 will become part of the bankruptcy estate. This rule applies to inherited property, property from a divorce decree or settlement agreement, death benefits, or the proceeds from a life insurance policy.
No limitations on the amount of debt. Unlike Chapter 13 bankruptcy, Chapter 7 bankruptcy rules do not impose a limit on the amount of debt a filer may have. Under Chapter 13, a debtor is ineligible if secured or unsecured debt exceeds debt limits.
No repayment plan. Under Chapter 7, the debtor does not have to repay debt in a court-approved repayment plan, unlike a Chapter 13 bankruptcy. The debtor is no longer responsible for repaying the debt after its discharge in Chapter 7.
The discharge of debts occurs quickly. In a typical case, the discharge of debt may occur in as little as three months. About 60 to 90 days after the debtor files for bankruptcy, the court will issue a discharge order. After the trustee distributes a debtor's property to unsecured creditors, the bankruptcy court will close the case.
The Disadvantages of Chapter 13 Bankruptcy
Only individuals are eligible. To petition for bankruptcy under Chapter 13, the debtor must file as an individual. If a person is the sole owner of a business or has a partner, Chapter 13 allows the debtor to file as an individual if the debtor has incurred personal liability for those debts.
The debtor must repay creditors. A Chapter 13 bankruptcy requires the debtor to repay creditors using a three or five year repayment plan. Consequently, the debtor must have sufficient income to pay creditors every month. The debtor must repay priority debts and secured creditors in full and must repay unsecured creditors in an amount equal to what those creditors would have received if the trustee had sold the debtor's nonexempt property in a Chapter 7 bankruptcy.
The debtor must meet debt limitation requirements. A debtor is ineligible for Chapter 13 if unsecured debt exceeds $336,900 or secured debt exceeds $1,010,650.
Contact a qualified bankruptcy attorney to find out your options for navigating the best path forward.