Chapter 7 vs. Chapter 13 Bankruptcy: A Primer

Most often the people that come to me for help in bankruptcy do not initially know the difference between Chapter 7 and Chapter 13 bankruptcy, which Chapter may be better for them or even which form of bankruptcy protection they qualify for.

The similarities between these two Chapters are fairly straightforward: both are forms of consumer bankruptcy protection that can discharge debts such as credit cards, medical liabilities, home mortgage deficiencies, personal guarantees and even taxes. Both Chapter 7 and Chapter 13 require that a petition and schedules be filed with the U.S. Bankruptcy Court for the District of Minnesota, listing all assets, creditors and certain financial information for the last two years. Both require one mandatory appearance with a bankruptcy trustee at what’s called the “341 Meeting of Creditors”. Both Chapter 7 and Chapter 13 bankruptcy  are eligible for a discharge of some or all of the debtor’s debts.

The differences are distinct and some of the forms of protection afforded under each Chapter need to be understood. Chapter 7 is what’s called a “straightforward” or “liquidation” bankruptcy: once filed, your assets are reviewed to see if you have non-exempt assets which need to be turned over to the trustee, and within three months a discharge of the debts is ordered. Chapter 7 has income qualifications under the “means test”, in that you generally must be around or below the median income for the state of Minnesota in order to qualify. As of May 1, 2012, the median income in Minnesota for one person is $47,618 or $63,101 for a household of two, $74,050 for a family of three, $86,910 for a household of four, and so on. If your gross household income is above this threshold, you are generally steered toward Chapter 13 bankruptcy instead.

Chapter 13 is distinctly different than Chapter 13 in that it requires a monthly payment of three to five years to be made to the Chapter 13 trustee under a Chapter 13 plan. After the successful completion of all monthly payments made under the Chapter 13 plan, the debtor is then discharged of any remaining debt. Unlike most Chapter 7 cases where creditors usually receive zero money, Chapter 13 affords most creditors some fractional repayment of the total amount owed. Determining the monthly Chapter 13 payment is something that your bankruptcy attorney will need to help determine using Minnesota standard allowances and some actual expenses, such as mortgage and car payments, domestic support obligations and other monthly liabilities that are not necessarily discharged in bankruptcy.

Most recently, homeowners have been taking more advantage of Chapter 13 bankruptcy to strip a second or even third mortgage on their homes. This is relatively new law in Minnesota and as of the date of this post is still pending on appeal in the 8th Circuit. Nevertheless, most other states recognize second mortgage stripping and Minnesota is following that trend. Your bankruptcy lawyer can help determine when a mortgage may be strippable in Chapter 13 bankruptcy.

In order to understand what form of bankruptcy protection is right for you and what you want to achieve long-term, you should consult a bankruptcy attorney for assistance that is specific to your situation. Wartchow Law Office is an exclusive bankruptcy practice offering free consultations to analyze your circumstances and offer practical guidance on your options in both Chapter 7 and Chapter 13 bankruptcy and even on-bankruptcy alternatives.

Located in Edina, Minnesota, Lynn Wartchow represents clients in all Chapters of bankruptcy in Minneapolis, St. Paul, Ramsey and Hennepin County, and throughout
Minnesota.

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