Should I file Chapter 7 or Chapter 13? Part 1 – Chapter 7

I can’t tell you how often we have clients calling us and explaining that they only want to file Chapter 7 bankruptcy, or they ask us “should I file Chapter 7 or Chapter 13“? There are various advantages and disadvantages to each chapter, and we explain these to our clients so that they can make an informed decision that’s right for them. Also, in some circumstances, you may not be able to file Chapter 7 and Chapter 13 can be a very good option for addressing debt.

What are the advantages of Chapter 7 bankruptcy?

Chapter 7 bankruptcy is a quicker process than Chapter 13 bankruptcy, and in most cases, no payments are made to creditors. However, Chapter 7 has a hurdle to filing called the “Means Test.” First, the Means Test looks back over the past 6 months for all sources of income. Next, the “Current Monthly Income” is calculated by averaging out monthly income. After that, the Current Monthly Income is compared to tables, which in Maryland are prepared by the United States Trustee, and if the Current Monthly Income it too high, the person or family wanting to file Chapter 7 has to take the Means Test.

For example, if a husband and wife have a 5 year-old daughter who lives with them, this would be a 3 person household. If, during the past 6 months, the husband and wife earned over $108,879 per year, or $9,073 per month, they would have to take the Means Test to determine if they can qualify for Chapter 7. The Means Test allows the couple to take certain deductions to see if they can qualify for Chapter 7. If the couple fails the Means Test, then if they wish to file for bankruptcy, they would have to file a Chapter 13 or Chapter 11 bankruptcy.

Another component in determining “should I file Chapter 7 or Chapter 13” is the value of your assets. Maryland uses its own exemptions to protect different kinds of property in bankruptcy, and if there aren’t enough exemptions to cover everything, Chapter 13 bankruptcy may be a good idea.

To illustrate this, assume an individual is looking to file Chapter 7 bankruptcy , but they have a bank account with $30,000 in it. In Maryland, exemptions at most would cover $11,000 of these funds, and if the person filed a Chapter 7, a Chapter 7 trustee would take the remaining funds of $19,000 and distribute them to creditors. This is particularly important around tax season, when many people receive tax refunds, which can be substantial. In this circumstance, the individual could file Chapter 13, or they can wait and use the funds for regular household expenses such as needed home or car repairs, until the funds in the account have gone down below exemptions.

Another common example is if someone has substantial equity in their home or other property they may own that cannot be exempted. If a person owns a home by themselves, with $100,000 of equity, a Chapter 7 trustee has the right to sell the home to pay off creditors. This may be a good option for some people if they wish to walk away from their home. Additionally, there are potentially up to $31,150 in exemptions that can be used on the home, in which case the person filing would receive those funds from the sale of the home.

What are the disadvantages of Chapter 7 bankruptcy?

There are some disadvantages to Chapter 7 bankruptcy, which can help answer “should I file Chapter 7 or Chapter 13”? Chapter 7 generally remains on a credit report for 10 years after discharge, as opposed to Chapter 13 which is 7 years after discharge. Chapter 7 cannot avoid statutory liens or second liens, such as tax liens, homeowner’s or condo association liens, and home equity lines of credit secured by a home. In some circumstances, Chapter 13 can avoid these liens.

In Chapter 7, a Chapter 7 trustee is given additional rights, such as the right to recover a preference made to a creditor within 90 days, or within 1 year for an insider, such as a business partner or relative. A Chapter 7 trustee also has the right to file a lawsuit for a fraudulent conveyance, which in Maryland has a 3-year statute of limitations.

If you are asking yourself the question “should I file Chapter 7 or Chapter 13” bankruptcy, please call Steiner Law Group, your Baltimore, Maryland bankruptcy lawyer at (410) 670-7060 and we can help you navigate which chapter of bankruptcy is the best option for you.