When to File for Bankruptcy Chapter 7 or Chapter 13

Differences Between Chapter 7 and Chapter 13 Bankruptcies

Before I get any further I’m going to go over the two common types of consumer bankruptcies – Chapters 7 and 13.

  • Chapter 7 – This type of bankruptcy wipes away all of your dischargable debts once it is finalized. I say dischargable debts because not every debt can be cleared in a bankruptcy. Debts you owe due to fraud, student loans and drunk driving are the three most common types of debts you might have that you can’t get rid of so easily.
  • Chapter 13 – This type of bankruptcy reorganizes your debts into a monthly payment, based on your income and stops creditors from harassing you. Debts that would usually accrue interest will stop accruing that interest and you’ll just have to pay back what the trustee says over the course of a few years.

Most people with a decent paying job will have to go for a Chapter 13 which at least gives your creditors some of their money back. Those who are unemployed or make too little money (usually under your state’s median income, or over if you pass a means test) can qualify for a Chapter 7.

Exempt Property

In a Chapter 7 bankruptcy, if you own a lot of property, chances are the trustee will be required to sell some of it and give the proceeds to your creditors. Even so, there are a few things which your bankruptcy trustee will not be able to touch, assuming the total value of everything is below a certain limit (Federal guidelines): * Everyday clothes, furniture, household goods, etc. – $12,625 total but no more than $600 an item. * Equipment needed for work – $2,375 * One vehicle – $3,775 * Jewelry – $1,600 * Homestead – $23,675 * Unused portion of homestead exemption/wildcard $11,850 * IRAs – $1.2 million

STATE EXEMPTIONS CAN BE VASTLY DIFFERENT – Find your state’s exemptions here

You can’t mix and match state and Federal exemptions, if your state lets you use the Federal exemptions, it’s usually a better deal.

There are about a dozen other exemptions mainly dealing with lawsuit benefits, insurance policies, etc. but for most people what you see above is what you’ll be working with. The unused homestead and wildcard exemptions can be used on anything you choose.

If you are married and filing bankruptcy jointly, you can double the dollar amount of everything.

Many states require you to use their own exemption rules, some of which are far more restrictive in dollar amounts. No matter what though, if you have very few assets, you are likely safe from losing anything.

Items you are currently paying off

Let’s say you have a car that is worth $8,000 and you still have $6,000 left on the loan. During a bankruptcy you can either choose to give the car to the lender or file a Statement of Intention detailing your plan to continue paying on your car loan.

Same thing with a house, depending on your state or Federal law, you get to exempt a certain amount of equity in your home. If you are still paying down a mortgage, you can file the same Statement of Intention to keep your home loan debt out of the bankruptcy.

Deciding Whether or Not to File and Which Chapter

The decision to file bankruptcy shouldn’t be taken lightly. It’s going to hit your credit pretty hard for a least a couple of years and it will remain visible for 7 years if it’s a Chapter 13 and 10 years if it’s a Chapter 7. However, if you have creditors breathing down your neck and court cases/judgments against you, it might be a reasonable choice.

As a good rule of thumb, if you are unemployed, or not making close to 150% of your state’s poverty level, and your dischargable debts equal more than around $20,000, Chapter 7 would set you free and clear. Keep in mind this is just a generic figure, medical debt can sometimes be forgiven through a hospital’s charity program if that’s where it was incurred. If you make too much money, a Chapter 13 can still help you knock off a good portion of your debt without losing much, if any, property in the process. You’ll find out by taking a means test.

Some lawyers will do a full bankruptcy for around $1,000, others might charge a little more. If you aren’t good with paperwork, it can be worth it to hire a lawyer, since the Schedules you’ll have to file can be a major pain.

The basic bankruptcy fee is $335 for a Chapter 7 and $310 for Chapter 13, for a simple case, you can see a lawyer is going to keep double that for themselves, but it can be well worth it. If you are ok with paperwork and have the time, doing it yourself can be a lot cheaper.

Filing Your Own Chapter 7 Bankruptcy

I’m going to stick with Chapter 7 because that’s what most people here who are asking about it would be eligible for.

I would recommend filing all of these forms together since it saves you a trip to the courthouse and you know you’ve got everything submitted before any deadlines pop up.

  • Pre-bankruptcy counseling – You will need to take an online course about managing your money, you can find a list of places here . Shop around a bit for the best price, you should be able to find something $25 or less. Notice how many names on the list are ridiculous? That’s because the Justice Dept. lists them in alphabetical order and having $$$$$$AAAA1 Credit Counseling at the very top gets them more business. After you complete the ~1 hour course, you will get a certificate you’ll need to save on your computer and print out.

This page has a great rundown on exactly how to file everything DISCLAIMER: The links provided on that page are good for all states, though it was setup by a non-profit for Illinois residents Exemptions are different in Illinois, and many other states, as opposed to Federal guidelines. Use this resource to help you file but refer to state-specific guidelines for your Schedules.

Schedules A-J

These forms tell the court all about your financial life, they include:

  • Property
  • Exempt Property
  • Secured Creditors (mortgage loans, car loans, etc.)
  • Unsecured Creditors (Credit cards, medical bills, etc.)
  • Contracts and Leases (Building/home leases, vehicle leases, other contracts)
  • Co-debtors
  • Income
  • Expenses
  • Expenses of a co-filer living apart from you.

Expect this part to take at least a couple of hours to fill out. If you are single or married filing alone, it might go a little faster, especially if all of your debts are in your name only.

Summary, Declaration, Other Paperwork

Your financial summary will include information from your schedules and give the court an easy(ish) to read snapshot into your life. The declaration you file just makes it clear that everything is true to the best of your knowledge.

If you are employed, you will also need to file a copy of your pay stubs from the last 60 days, as well as a copy of your most recent tax return or transcript.

For secured creditors, filing a statement of intention lets them know what you plan on doing with the property. If you need a car and can still afford the payments, you will let the court, and the creditor, know that you want to keep it and continue paying. At this point you can redeem the property, which is essentially paying fair market value for it in cash, even if you owe more than it’s worth.

Most states also want you to file a creditor matrix which gives the name, address and relevant account number of yours so they can send them a notice of your bankruptcy.

Don’t try to hide property/cash

Bankruptcy trustees can clawback property you sell or transfer to those close to you. Giving your sibling your boat isn’t going to save it from the bankruptcy court if you don’t have enough to exempt it. Generally, anything given or sold within 1 year of filing is fair game for being clawed back.

*After Filing

When you file and pay your fee (or submit a payment schedule) a stay will be put on any court cases that are currently pending against you. In addition, creditors have to stop trying to contact you as soon as they get notice that you have filed. Usually this happens within a couple of days.

If you happen to have unexempted property, especially if it is well over the exemption limit, the trustee will effectively “own” it for the time being. It may not be taken immediately but if the trustee thinks it is worth it to sell, they have the right to take it.

Meeting of Creditors For 99% of PF users, the meeting of creditors will take a few minutes because nobody is going to show up. You are still required to be there and the trustee will be there but unless you owe someone a substantial amount of money (well into the mid-five figures or higher, excluding medical debt) it will be the quickest aspect of your bankruptcy case.

After the Creditor Meeting

If you’ve filed everything upfront, there isn’t much more you are required to do. Creditors can request to see your tax return, and you would have to give them access to it, but that’s about it. They do have 60 days to file an objection to the discharge, which only happens in very rare cases, mainly involving businesses.

Within 180 days after the creditor meeting you will receive your discharge.

After the Discharge

The majority of creditors will simply live with it and move on, a few shady debt collectors might try to collect afterwards but they are few and far between. Even so, keep an eye on your credit report:

  • AnnualCreditReport.com – Government mandated credit reports given out once a year from all three bureaus.
  • Credit Sesame – Alerts you if something new pops up on your credit, lets you see your credit report and score regularly.
  • PF Wiki credit checkers – Variety of different places to find your credit report/score

Unless you come into a LOT of money, don’t bother trying to purchase a home for at least a year and a half after the discharge. Hardly any lender is going to approve you with a recent bankruptcy.