Consumer Bankruptcy: Chapter 7 vs. Chapter 13

Most personal bankruptcies are filed under Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code. Your personal situation determines which route is best for you.

Looking at national statistics, 69% of all consumer bankruptcies were filed under Chapter 7. Texas showed a smaller percentage at 63%. Deciding which bankruptcy chapter is best for you depends on your income, assets, debts, and other circumstances.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is often the preferred bankruptcy because it offers the possibility of wiping out all qualifying debt. The individual is no longer responsible for a single cent.

That sounds fantastic, but there are many caveats that cause someone to file under a different chapter.

The Chapter 7 Means Test

First, qualifying for Chapter 7 requires an income that is below the median income for a family of the same size. This is called the “means test.” Someone heading up a family of four, for example, will be compared to the median income for a Texas family of four.

Effective after May 1, 2022, the Texas median incomes (monthly/annual) for some household sizes are as follows:

  • Household of 1: $4,620.08/$55,441.00
  • Household of 2: $6,210.67/$74.636.00
  • Household of 3: $6,727.75/$80,733.00
  • Household of 4: $7,782.17/$93,386.00

If you are below this income limit, then you will qualify for Chapter 7. If not, then the second part of the means test evaluates your monthly household expenses and remaining disposable income. You will still qualify for Chapter 7 if your basic living expenses are too high for your income.

Failing both parts of the means tests does not disqualify you from filing for Chapter 7. You will need to consider filing under Chapter 13.

What Is and Isn’t Dischargeable in Chapter 7

Second, not all debt is dischargeable. If for example, most of your debt is a mortgage or other secured loan, Chapter 7 might not hold much value for you.

Most unsecured debt can be discharged under Chapter 7 including the following:

  • Medical bills
  • Back rent
  • Utility bills
  • Personal loans
  • Credit card charges
  • Some income taxes

Mortgages, car loans, child support, alimony, certain taxes, and most student loans are not dischargeable.

Property Can Be Sold in Chapter 7

The bankruptcy trustee can sell your property and use those proceeds to partially honor your debt to creditors. The remaining debt is forgiven. Of course, if you have no property to sell, the eligible debt will be erased.

The trustee cannot take anything and everything. There are exemptions allowed by law and vary by state.

Texas allows the following exemptions:

  • Unlimited equity in a house not to exceed 10 acres in a city, town, or village (up to 200 acres elsewhere)
  • One vehicle per household
  • Personal property up to $50,000 for a single person or $100,000 for a family (some limits apply)
  • Retirement accounts
  • Workers’ compensation
  • Public assistance

Other exemptions may apply.

Chapter 13 Bankruptcy

Those who do fail the Chapter 7 means test can still file for Chapter 13 bankruptcy. Another reason to consider Chapter 13 is if you have a home, a car, or other assets that you want to keep. You will be able to make up for overdue payments by reorganizing your debts.

No Chapter 13 Means Test

There is no means test for Chapter 13 as there is in Chapter 7. That said, your income is important. You must have a regular income that can support your ability to make regular monthly payments, albeit at a reduced rate.

Payment Plan for Outstanding Debt

Chapter 13 allows you to keep all your property. The debt is not erased but instead is reduced. The reduced debt is paid off in a court-approved three- to five-year payment plan. Any remaining balance in the plan will be forgiven if all payments are made in full and on time. Like Chapter 7, child support and spousal support are not dischargeable.

A bankruptcy trustee evaluates your financial condition to create a plan that is fair to you and your creditors. Debt collectors can no longer pursue any obligation that is included in the repayment plan, but Chapter 13 isn’t full proof. For example, your home can still be foreclosed if you do not make the required payments.

Which Bankruptcy Chapter Is Best for You

Every person has a unique financial position. At the Law Offices of Mark M. Childress, PLLC, we can fully explain the different bankruptcy chapters and how each intersects with your specific situation. Filing for bankruptcy is a difficult decision. We understand that. Delaying bankruptcy can make matters worse.

Learn about your bankruptcy options in a free consultation. We offer judgment-free and compassionate advice. Contact us online or call (817) 497-8148.

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