Is Chapter 13 Bankruptcy Better Than Chapter 7?

For some Minnesota debtors, Chapter 13 might be the only option

By Doug Mentes, Esq.

If you’re considering filing for bankruptcy, you’ll typically want to file under Chapter7, because it offers an immediate discharge of all debts (with some exceptions). With a Chapter 13 bankruptcy plan, the debtor will pay some amount toward their debts over a period of three to five years before their debts are discharged. For some debtors, there may be no other option than to file under Chapter 13. For others, filing under Chapter 13 might be the better option. To evaluate which chapter a debtor should pursue, they must first determine their current monthly income and whether that income is sufficient to pay their debts.

Determining current monthly income

To determine the debtor’s current monthly income (CMI) for bankruptcy purposes, they must calculate all income received during the six full months before filing. For example, if a debtor is filing for bankruptcy on August 15, that debtor would calculate all income for the months of February through July, and then divide that income by six. For debtors who do not receive consistent income throughout the year, they will want to time their filing when their CMI is favorable.

For married debtors, their spouse’s income must be included in their CMI, unless the couple is legally separated. This is the case whether a debtor is filing for bankruptcy together—with their spouse—or as an individual.

The means test

A means test has been developed to ensure that only debtors without the means to pay their debts qualify for a Chapter 7 discharge. If the debtor has means (excess disposable income) to pay their debts, their creditors should have access to that extra income to satisfy at least a portion of the debt.

The means test has two parts. The first involves determining if the debtor’s CMI is more or less than the median family income for Minnesota. If it’s less, the debtor passes the test and qualifies for a Chapter 7 discharge. If the debtor’s income is higher, they must complete the second part of the means test calculation to determine if they will qualify for a Chapter 7 discharge.

This second calculation involves deducting certain necessary expenses from the debtor’s CMI to determine how much disposable income the debtor has. If they’re not found to have enough disposable income, they will pass the means test and qualify for a Chapter 7 discharge. If not, the debtor will only be able to file under Chapter 13.

Assets

Chapter 7 bankruptcy is often called “liquidation,” because a trustee is appointed by the court to inventory the debtor’s assets and sell those assets off to pay creditors. Many assets are exempt from liquidation by the trustee during bankruptcy. However, some are not, or are worth more than the exemption allows. If a debtor wants to keep a non-exempt asset or prevent sale of an asset valued more than the exemption, their only method may be to file under Chapter 13.

For example, a debtor who owns a home or vehicle with equity of an amount greater than the current exemption amount may not want to lose that property. A debtor will likely be able to keep that asset in a Chapter 13 bankruptcy—however, the amount of non-exempt assets a debtor owns will be used to calculate the minimum amount that debtor must pay through their Chapter 13 plan.

Previous bankruptcies

If a debtor has already received one discharge under Chapter 7, that debtor must wait:

  • eight years to file a second Chapter 7 bankruptcy petition
  • four years to file a Chapter 13 bankruptcy

Those time periods are calculated from the filing date of the first bankruptcy petition.

These issues and more must be considered when consumers determine which chapter to file under for bankruptcy. The first step you should make prior to making this decision is to speak with an experienced Minnesota bankruptcy attorney.

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