Filing for Bankruptcy: Chapter 7 or Chapter 13?

Regardless of whether you hire a bankruptcy lawyer or go it alone, you’ll have to decide between Chapter 7 or Chapter 13 bankruptcy. If you’re working with a bankruptcy lawyer, he or she will review your financial information and suggest whether to file Chapter 7 or 13. If you’re filing on your own, the easiest way to make the choice between 7 and 13 is to assess whether you have mostly secured or unsecured debt:

  • If most of your debt is unsecured debt, you should most likely file Chapter 7, assuming you meet the eligibility requirements for a Chapter 7 bankruptcy. The most common examples of unsecured debt are credit cards and medical bills.
  • If most of your debt is secured debt, you should most likely file Chapter 13, assuming you meet the eligibility requirements for a Chapter 13 bankruptcy. The most common secured debt is for automobiles, boats, homes, and possibly businesses.

What is the difference between Chapter 7 and Chapter 13?

Chapter 7 is full bankruptcy. The court will liquidate your assets in order to pay your creditors. Chapter 13 is a reorganization plan. You’ll file a plan with the court on how you plan to pay your creditors and you generally keep your stuff.

Before you can actually file either Chapter 7 or 13, though, you first need to determine whether you’re eligible to file for bankruptcy in the first place. Having a significant amount of secured or unsecured debt that you can’t pay off does not automatically qualify you to file. The court will take into consideration your income, expenses, and your history of filing for bankruptcy must also meet certain requirements.

Eligibility Requirements for Chapter 7 Bankruptcy

To be eligible to file Chapter 7 bankruptcy, you:

  • Must NOT have received a Chapter 7 bankruptcy related discharge within the past eight years.
  • Must have an income level below your state’s median income.

If your income DOES exceed your state’s median income, you must pass a means test, which analyzes your monthly income, expenses, and unsecured debts to determine how much money, if any, you have left over each month to put toward those debts.

Income Level and the Means Test

If you’re attempting to file Chapter 7, you must take the means test only if your income level during the six months prior to filing for bankruptcy exceeds your state’s median income level during the same time period. A majority of potential Chapter 7 filers get to skip the means test based on income. To find your state’s median income level, see median income tables at The US Department of Justice web site.

For a family of four, the range peaks at $92,205 in Connecticut and drops to a low of $47,726 in Mississippi. Quite a range, no?

Taking the Means Test

You can find the means test online at Revised Rule and Forms at the web site .

“Taking” the test involves completing a six page form that requires you to inventory and add up the financial facts of your life. Calculating the results yourself can be tricky, so it’s generally best to have a bankruptcy lawyer familiar with the test assist you. Ultimately, whether you pass or fail the means test comes down to the following:

If your monthly income and expenses leave you with less than $166.66 per month to spend on existing debts, you pass the means test.

If you pass the means test and have not received a recent bankruptcy related discharge, then technically you should be eligible to file for Chapter 7 bankruptcy. But the final decision on whether you qualify for Chapter 7 is made by the bankruptcy court and doesn’t occur until after you’ve filed your petition. Bummer.

What If You Fail the Means Test?

Roughly 80% of potential Chapter 7 filers whose income level qualifies them to take the means test do pass the test. If you don’t pass, you have two options:

  • Retake the test when you will qualify. The means test is based on financial data from the past and includes one-time expenses and income sources. So even if you don’t qualify based on the previous six months, you might qualify based on your financial situation.
  • Consider Chapter 13 instead. If the means test prevents you from qualifying for Chapter 7, you can still file for Chapter 13 bankruptcy, assuming you meet the eligibility requirements for Chapter 13.

Eligibility Requirements for Chapter 13

The eligibility requirements for Chapter 13 bankruptcies aren’t as stringent as those for Chapter 7 bankruptcies. No means test is required, and any individual can file, provided that he or she meets the following requirements:

  • Debt levels. Your secured debts can’t exceed $922,975. Unsecured debts can’t exceed $307,675.
  • Prior filings. You must not have received a Chapter 7, 11( business reorganization), or 12 (farmer’s bankruptcy) discharge within four years or a Chapter 13 discharge within two years of the filing date.
  • Prior dismissal. You can’t file for Chapter 13 if a prior bankruptcy petition was dismissed within the previous 180 days due to a failure to appear in court, failure to comply with court orders, or a voluntary withdrawal from the case on your part.
  • Income source. You must have a regular source of income from a job or other qualified source, such as disability benefits, trust funds, or investment-related income. Your income must exceed your expenses.

Exempt Property in Bankruptcies

Under the Code, all property and assets can be defined as belonging to one of two categories:

  • Exempt property. Refers to the property that you own on the date of filing for bankruptcy that the court can’t legally seize and sell in order to pay back creditors
  • Property of the estate. Refers to all the property you own at the time of filing (property of the estate not covered by an exemption is subject to seizure)

What Property Qualifies as Exempt?

The kinds of property that qualify as exemptions vary from state to state. Some states use their own list of exemptions exclusively. Other states allow you to choose to use the state’s list of exemptions or the list of exemptions authorized by the federal government in section 522(d) of the Code, which specifies items exempt (up to a certain value) from seizure and sale as a result of filing for personal bankruptcy. These items can include jewelry, cars, and homes.

Bankruptcy is serious business

Please don’t enter into this decision lightly. It will affect you and your family for years to come, but if you truly feel you have no other choice, arm yourself with information and create a plan for how you will alter your behavior AFTER you’re discharged. More on that later!

Note: I am not a lawyer and the information I gathered here came from The information contained in this article should NOT be substituted for sound legal opinion, nor cited or relied upon as legal advice.

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