Chapter 7 or Chapter 13: Which One Should I File?


Making the decision to seek relief under bankruptcy is tough enough. But once someone decides to file, they have another important decision to make. What type of bankruptcy should be pursued? The two are not the same and each has its own benefits and limitations.

How Chapter 7 Works

Chapter 7 bankruptcy is also known as liquidation bankruptcy. Chapter 7 will discharge most unsecured debts such as credit cards, medical bills, judgments, deficiencies, etc.

Debts that are secured, such as a mortgage or car loan, are not discharged if you want to keep the house and car. The Court will appoint a Trustee to administer your case by reviewing your list of assets and liabilities and your income.

You are allowed to keep your “exempt” assets such as home, vehicle, insurance, retirement accounts and tools of trade. If you have “non-exempt” assets such as rental properties, stocks and bonds, or proceeds from a lawsuit, the Trustee will use the money from these nonexempt assets to pay off your creditors as much as possible.

Once the sale process is completed and debts are paid, any remaining unpaid debt will be discharged. The overall process for Chapter 7 takes three to four months to complete.

Chapter 7 Benefits

Filing a bankruptcy under Chapter 7 has many benefits. For instance, if a debt is associated with an asset and is otherwise secured (ie house and car), that asset can be kept.

However, if property is owned that is not exempt, the debtor may be required to turn them over to the Trustee for repayment of your creditors. Chapter 7 is a faster process than Chapter 13, and the debtor is not required to repay their unsecured debt. Those debts are paid, if at all, through the sale by the Trustee of your nonexempt assets.

Chapter 7 Limitations

Chapter 7 is generally available to those persons who satisfy a “means test.” If an individual's average monthly income is equal to or less that the average income of others in their area, they are probably eligible to file a Chapter 7.

High-income earners may not be eligible to pursue Chapter 7 and instead would be eligible for a Chapter 13. Further, if you are facing foreclosure on your home, a Chapter 7 filing can only temporarily stop the foreclosure process.

If the debtor currently do not own a home and wish to purchase one in the future, they may experience a delay in getting a future mortgage. Chapter 7 bankruptcy filings, or bankruptcy filings in general, can stay on an individual's record for up to ten years.

That blemish appears when a mortgage company is running a credit record, and many lenders may suspend or delay the process once they see that someone has recently filed bankruptcy.

If more than two years have passed since someone has received a Chapter 7 discharge and they are otherwise qualified, they can get a mortgage even if it means a little higher interest rate.

How Chapter 13 Works

Chapter 13 is otherwise known as the “reorganization” bankruptcy. In this type of bankruptcy case, you repay your creditors over a 3-5 year period. It is especially helpful to stop foreclosures, repossessions, garnishments, levies, etc.

In a Chapter 13 case, the filer proposes a debt repayment plan that will allow payment in full of secured debts, taxes and some or all unsecured. Once the plan is completed, any remaining unsecured debts will be discharged.

Chapter 13 Benefits

The Chapter 13 filing process may take up to 5 years to complete. The repayment plan is based on factors such as your income, expenses and the amount of debt you need to repay.

No property is liquidated under Chapter 13; therefore, the debtor does not risk losing any of their property (unless they choose to). Further, no means test for eligibility exists for Chapter 13. However, unsecured debt and secured debt must be below a set statutory amount.

More individuals elect to file Chapter 13 than Chapter 7.

Chapter 13 Limitations

Unlike Chapter 7, filing under Chapter 13 takes longer and requires that the debtor continue making payments on their debt obligations. Further, Chapter 13 requires that the individual have a source of income.

Otherwise, they will not be able to pay their living expenses and keep up on monthly payments required under the bankruptcy plan. If the debtor does miss a payment, that could seriously jeopardize their ability to successfully complete their Chapter 13 Plan.

And, as with Chapter 7, Chapter 13 can also limit a debtor's chances of getting a mortgage in the near future. There are lenders who work with individuals who have bankruptcies on their credit records, so what seems impossible may not always be impossible.


An experienced Texas bankruptcy lawyer can help you apply bankruptcy exemptions in the best way possible and can help address any concerns you have about the bankruptcy process.

Please call the Law Office of Marilyn D. Garner today at 817.381.9292 for a free consultation to discuss which type of bankruptcy may help you.

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