Is Chapter 13 Bankruptcy Better Than Chapter 7?
For some Minnesota debtors, Chapter 13 might be the only optionBy Doug Mentes, Esq. | Last updated on January 10, 2023
Use these links to jump to different sections:debtor is filing for bankruptcy together—with their spouse—or as an individual.
The Means TestA 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.
AssetsChapter 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 BankruptciesIf 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
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