Is Chapter 13 Bankruptcy Better Than Chapter 7?

Use these links to jump to different sections:

• The Means Test
• Assets
• Previous Bankruptcies

Chapter 7 vs. Chapter 13. If you’re considering filing 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 make monthly payments toward their debts over a three to five-year repayment plan 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 regular income and whether their monthly income is sufficient to pay their debts. 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 a different type of bankruptcy, often called “liquidation,” because a bankruptcy trustee is appointed by the court to inventory the debtor’s assets and sell those assets off to pay creditors. Many types of debts 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 nonexempt property 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 reorganization 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 case

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 a law firm or an experienced Minnesota bankruptcy attorney. A bankruptcy lawyer may provide legal advice about bankruptcy law and discuss your bankruptcy options. For more information on this area of law, see our bankruptcy overview.