Chapter 7 bankruptcy is a liquidation. But Chapter 13 bankruptcy is a repayment plan. Typically, Chapter 13 filings are used by wage earners who earn too much money to file for Chapter 7 or for individuals who are seeking to protect their home worth more than Chapter 7 allows.
Chapter 13 filings give you the opportunity to repay the arrears on a mortgage over five years. It also gives you the opportunity to repay child support arrears over five years, which could help people avoid prison who are behind on child support. It also can provide ways to repay non-dischargeable tax debt over five years and repay a portion of your debt to unsecured creditors while achieving a full discharge.
The Main Differences Between Chapter 7 And A Chapter 13 Bankruptcy
Unless you’re in foreclosure or you’ve had a car repossessed, Chapter 7 provides the quickest discharge and is almost always what I recommend because Chapter 7 costs you the least amount of money. It normally results in the least repayment to creditors. Not that I dislike creditors getting repaid, but I work in the best interest of my consumer bankruptcy clients.
In a Chapter 7 bankruptcy, you don’t have to repay your creditors. There’s no repayment plan. In a Chapter 13 bankruptcy, on the other hand, there’s a three to five-year repayment plan where your creditors receive payments of your disposable income on a monthly basis. Most of the time when you’re in Chapter 13, the repayment plan is paying money to a secured creditor such as a car loan or mortgage loan that you’re looking to reinstate.
Depending on the judge, you can apply for loss mitigation in Chapter 13. Loss mitigation is the process of negotiating a mortgage modification with your mortgage lender. It allows you, the homeowner, to catch up on the payments.
Should you no longer be able to afford your home, it also allows you to gracefully leave the home, avoiding foreclosure. In Chapter 13, you normally get more time than you can in Chapter 7 for loss mitigation.
Qualifying For Chapter 7 Bankruptcy: The Means Test
The means test is an artificial test, (not based on reality), that was developed by Congress and is written into the Bankruptcy Code. It uses your average monthly income over the last six months to determine whether or not you qualify for a Chapter 7 bankruptcy.
Means Test Part I: To pass the test in Chapter 13 means that your wages must be enough to make payments for three to five years.
The means test looks at your household income not just your individual income. If you’re married and your spouse is working and you live together, both your incomes will be used on the means test to determine whether or not you qualify.
Means Test Part II: If you’re above the median income, which in Long Island, New York is $118,872.00 per year as of August 2022, you may get certain deductions. You can take out what you pay for the below expenses, which is not an all-inclusive list:
- Taxes
- Health Insurance
- Union Dues
- Disability Insurance
- Child Support
- Charitable Contributions of up to 15% of your income (These have to be regularly made to qualify on the means test.)
- Mortgage Payments
- Arrearages On Mortgage Payments
- Priority Debts
- Owed Taxes Incurred In The Last Few Years
- Car Ownership Expenses
- And more…
Your payment for three to five years can be determined after all your deductions have been identified.
After you go through all the deductions, we can determine whether or not you qualify for relief under chapter 7 or chapter 13.
The Debt That Will Not Be Dischargeable In A Chapter 7 Personal Bankruptcy
Everything other than the following can be discharged under a Chapter 7 filing:
- Taxes incurred in the last three years;
- Sales tax obligations if you owned a business and collected sales tax;
- Restitution for a criminal matter;
- Fiduciary obligations;
- Student loans, except in very limited circumstances.
About student loans…
You can sue the student loan servicer in a separate lawsuit outside of the traditional bankruptcy case to determine whether or not repaying the debt causes an undue hardship.
The courts in the second circuit, (which is where my offices are located), have taken a narrow approach to that although it has been expanded under a few recent decisions. It can take a long time to prosecute a dischargeable action for student loans.
Most individuals who would be able to show an undue hardship cannot afford the attorney’s fees involved in proceeding. But our hope is that Congress will enact laws to make access to student loan discharge more available to the general population.
For more information on Bankruptcy Law in New York, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling (516) 550-5467.