Bankruptcy: Chapter 7 vs Chapter 13

In today’s economy, taking on a certain level of debt has become a normal part of existence. From purchasing a house and funding college tuition to owning a car and paying medical expenses, almost every household in the United States holds some form of debt. In fact, as of 2011, 69% of American households held some form of debt, with a median amount of $70,000, and a study found that the average US household credit card debt currently sits at $15,706 as of June 2015. Bearing these statistics in mind, many Americans are an unforeseen injury, job loss, or emergency expense away from facing the possibility of bankruptcy. Therefore, it is important as a debtor to know the different types of bankruptcy and what it could mean for you and your assets in the event of an emergency.

In 2014, there were 935,795 bankruptcy filings in the United States, with only about 3% of filings belonging to businesses. The other 97% belonged to individuals and are divided between two types of bankruptcy: chapter 7 and chapter 13. In Chapter 7 bankruptcy, the courts discharge all debts that you currently owe in return for liquidating some of your assets and distributing them to your creditors. The process is relatively simple by requiring minimal filing fees, credit counseling, and only about four to six months in total, provided that you haven’t been discharged from bankruptcy within the past six to eight years. According to state laws, some of your assets are exempt from collection however, such as equity in your home, the value of insurance policies, retirement plans, pieces of personal property, and pubic benefits like Social Security. For a full list of exemptions in California, visit here. Although Chapter 7 bankruptcy seems like an ideal situation considering the circumstances, it is not an available option for everyone. In order to qualify for Chapter 7 bankruptcy, you must pass the “means test,” which determines whether your income is low enough to be eligible.

If your income is not low enough or you have disposable income to repay portions of your debt, then this falls under Chapter 13 bankruptcy. Chapter 13 bankruptcy differs from Chapter 7 in that instead of wiping your debt clean, the courts set up a strict repayment plan, based on your income and assets, so that you can return your debts over a three to five year period. Under Chapter 13, you don’t lose any property because you are paying via your income, but none of your debts are wiped clean. Within Chapter 13, debts are prioritized between secured and unsecured debt, with priority going to child support, alimony, certain tax obligations, and wages owed to employees.

Due to the nature of Chapter 7 bankruptcy it is possible to file pro se and handle the case yourself. Especially if you are trying to save money on attorney’s fees, some reading and research can give you the tools to tackle the issue yourself. For example, in the central District of California in 2011, 28% of all bankruptcy filings were undertaken by pro se litigants, so it can be done. However, if you are filing under Chapter 13, it is always best practice to speak with a bankruptcy attorney to explore your options and see what the best strategy is for your personal situation. Carrying too much debt can be crippling, so learn your rights today and save yourself from losing assets down the road.