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Bankruptcy Chapter 7 vs 13: Which Is The Best Option?

Which Should You Choose Between Chapter 7 and Chapter 13 Bankruptcy? 

Dealing with debt can be overwhelming, and bankruptcy might seem like an option. There are two main types: Chapter 7 helps wipe out debts quickly, but you must earn below a certain amount and may need to sell belongings. Chapter 13 helps repay debts in a few years with a regular income, ensuring organized payments. 

These two main types of bankruptcy that people can file for have different rules for what happens to your belongings, who can file, and how they affect your credit score. If you are in Broomfield, Colorado, and considering bankruptcy, it is crucial to understand the differences between these two options to choose the right one for you.

Short Summary: 

  • Chapter 7 offers quick debt elimination but may require selling assets, while Chapter 13 facilitates a 3-5-year repayment plan for those with stable incomes.
  • Chapter 13 eligibility considers income, assets, and debt, and it may not be suitable if monthly payments are unaffordable. Chapter 7 requires passing a means test based on income.
  • Chapter 7 involves selling non-exempt assets to clear debts, risking the loss of some property. Chapter 13 allows retaining assets by gradually repaying equity, offering protection from foreclosure.
  • Considerations include the desire to save a home (favoring Chapter 13), preventing wage garnishment (both chapters provide relief), and the need for a faster, more affordable option (favoring Chapter 7).

What’s the Difference Between Chapter 7 and 13 Bankruptcy? 

Declaring bankruptcy can either eliminate debt or provide extra time to repay it. Those who file for bankruptcy usually cannot afford to pay their bills because their debts exceed their income.

The two types of bankruptcy that aim to help you start fresh are Chapter 7 and Chapter 13. However, they work differently. Chapter 7, called liquidation bankruptcy, gets rid of your debt and is for those who cannot afford to repay their debts. In contrast, Chapter 13 reorganizes your debt and is better for those with a stable income and valuable assets.

Does the Choice Between Chapter 7 and Chapter 13 Matter?

You may not get to pick which bankruptcy chapter you want. Your eligibility depends on your assets, debt, and income. Below are the following criteria for each bankruptcy type. 

Chapter 13 Qualifications 

Sometimes, if your income is too low, Chapter 13 bankruptcy might not be the right choice for you. In Chapter 13, the court sets up a payment plan for you. What you need to pay back depends on your income, assets, and debt type you have. 

It will also not work if you cannot afford monthly payments based on these factors. Also, you can only go for Chapter 13 if your total debts (secured and unsecured) are less than $2.75 million when filing for bankruptcy.

Chapter 7 Qualifications 

Passing the means test to be eligible for Chapter 7 bankruptcy is crucial. This test ensures that those with the means to repay their debts do not misuse bankruptcy. You qualify for Chapter 7 if your family’s annual income is lower than the median income for your household size in Colorado. As of April 1, 2023, the median incomes are $75,710 for one earner, $98,365 for a two-person household, $113,822 for a three-person household, and $134,146 for a four-person household, with an additional $9,900 for each person beyond four.

Calculating Your Income 

To compute your bankruptcy income, look at what you earned each month in the six months before filing, excluding the filing month. For example, calculate from April 1 to September 30 if you filed in October..

Add up all your gross income for these six months, which is what you earn before taxes and deductions. Countable gross income includes the following: 

  • child support,
  • alimony, 
  • workman’s compensation, 
  • pension/retirement income, 
  • short/long-term disability payments,
  • your paycheck, and
  • rental income.

Exclude certain benefits like Supplemental Security Income (SSI), Social Security Disability Insurance (SDI), or Veterans Disability income (VDI) when calculating income for Chapter 7. You pass the means test if your household relies only on these benefits.

Add up your monthly income and divide by six to get your current monthly income. Remember that this may not represent your exact current earnings due to overtime or bonuses. Then, multiply this monthly income by 12 and compare it to the annual income of a Colorado household of your size.

Do I Still Qualify If I Make Too Much Money? 

You might still qualify if your income is too high for Chapter 7 bankruptcy. After the first calculation, there are two additional tests if your income appears too high based on Colorado’s median. The second one allows you to subtract certain expenses to see how much money is left for debts. 

Some, like certain military veterans and businesses, are exempt from this test. If you still do not meet the Chapter 7 income limit, you might consider filing for Chapter 13 bankruptcy.

What Happens to My Property If I File for Bankruptcy? 

A crucial distinction between Chapter 7 and Chapter 13 is how your property is handled.

Chapter 7 Property

Under this chapter, you clear your debts by selling some of your property. The court sells assets not protected by bankruptcy laws. You don’t owe dischargeable debts anymore after finishing this chapter. However, certain debts like taxes or student loans may remain. Secured debts for property you are keeping, such as a car loan or mortgage, are an exception. 

There is also a risk of losing non-exempt property, like luxury items, or if your home or car equity is too high. However, federal and Colorado laws have exemptions to protect certain items. 

Chapter 13 Property

You can keep your property by gradually repaying the equity in Chapter 13 bankruptcy. It does not erase your debts but gives you more time to manage them. For instance, if your home is at risk of foreclosure, Chapter 13 can stop it. It gives you some time to sell the property without losing equity.

You create a plan in Chapter 13 to reorganize your debts, protecting assets like your car and house from repossession or foreclosure. Although you can get temporary relief from creditors, the debt does not go away. You make monthly payments for three to five years depending on your income. After completing the payment plan, you get a discharge, relieving you of most debts. 

However, certain debts cannot be discharged:

  • alimony,
  • child support, 
  • tax debts, 
  • student loans, 
  • fraud-related debts and
  • mortgages

How Do I Choose the Right Bankruptcy Type?

The faster and more affordable option is Chapter 7. It is suitable for those with limited income and few assets. Chapter 13 might be better if you are behind on mortgage payments and want to keep your home. Chapter 13 might also suit you if you cannot file Chapter 7 again within eight years. Opting for Chapter 13 lets you retain certain assets and catch up on overdue secured debt payments. Below are some considerations to make when deciding which bankruptcy to file. 

Want to save your house? 

Chapter 13 is a good option for preventing foreclosure and curing arrearages. It helps if you are behind on mortgage payments. With Chapter 13, you create a plan to catch up on missed payments over 3-5 years. This way, you can keep your home, make regular mortgage payments, and gradually clear the overdue amounts. 

Worried about wage garnishment? 

If you risk having your wages taken due to debts, filing for Chapter 7 or Chapter 13 bankruptcy can help. Both types of bankruptcy stop wage garnishment and other creditor actions through an automatic stay. This legal order provides temporary relief, giving you time to address your financial situation without the immediate threat of losing part of your paycheck.

Call Us for Guidance On The Best Bankruptcy Type For You!

Navigating the complexities of bankruptcy can be overwhelming. But clarity and financial relief are within reach with the Law Office of Clark Daniel Dray by your side. When facing the decision between Chapter 7 and Chapter 13 bankruptcy, our legal team is dedicated to providing personalized guidance tailored to your unique situation. 

At our firm, we understand the weight of financial stress and the nuances of each chapter. We will ensure you make informed decisions that align with your goals. Whether seeking a fresh start through liquidation or a structured repayment plan, the Law Office of Clark Daniel Dray is your trusted partner in achieving a debt-free future.

Take control of your financial future—schedule a free consultation today. Our commitment is not just to your debt-free tomorrow. We want to empower you with the knowledge and support to make the right decisions for a brighter financial journey. 

Aside from our office in Broomfield, we also provide bankruptcy and estate planning legal services in Boulder, Denver, Littleton, and Louisville, Colorado.




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