- The eligibility requirements for Chapter 7 and Chapter 13 are different. Chapter 7 is straight or complete bankruptcy, in which all of a debtor's assets (minus certain exempt property) is liquidated and used to pay his debts to the fullest extent possible. Any remaining debts, other than a few exceptions, are then forgiven. Chapter 13 is much different. Here, a debtor establishes a plan to pay off his debts, possibly with some relaxed terms from the creditors. The debtor makes regular payments to a trustee, who then distributes the funds to the creditors. Because Chapter 7 allows for forgiveness of large amounts of debt, it was considered abusive by creditors, and the law was changed to make it harder to file Chapter 7.
- You can file for bankruptcy as often as you like, but that doesn't mean it'll work. If you're looking to file for Chapter 7, you cannot have had another Chapter 7 discharge within the past eight years, or a Chapter 13 within the past six. If you're filing for Chapter 13, you will be barred if you filed for Chapter 7 within the previous four years, or for Chapter 13 in the previous two.
- The major obstacle to filing Chapter 7 is what's called the means test. This refers to the requirement that Chapter 7 filers earn less than or equal to the median average annual income in their state for households of the same size. This is calculated by annualizing the debtor's average monthly income for the previous six months, less some deductions for expenses, and annualizing (multiplying by 12). If your income is above the median, you can still qualify for Chapter 7 if your monthly disposable income (after certain deductions for expenses) is less than a certain amount ($182.50 in 2008).
- Those who do not qualify for Chapter 7 might be eligible to file for Chapter 13, under which debts will be paid out of the debtor's disposable monthly income. To qualify for Chapter 13, the debtor must demonstrate that he has adequate income, which can come from a wide variety of sources including pensions, Social Security, disability, child support or regular wages. You must be current on your state and federal tax returns, however, and will have to file proof of filing for the previous four years. A Chapter 13 plan can be either three or five years in length, and a debtor's income must be sufficient such that he can satisfy his debts (subject to renegotiations) within that period with his disposable monthly income.
- Chapter 13 also has restrictions based on the size of debt. Those with very large debts must file for Chapter 11 bankruptcy, which is designed for corporations and wealthy individuals. The maximum in secured debts you can have to file Chapter 13 changes every three years, but was $1,010,650 in 2007. Secured debts are those collateralized by specific property, such as a car or a house. The maximum amount of unsecured debt you can hold going into Chapter 13 in 2007 was $336,900.
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counselor40 said
on 7/27/2009 Good piece on the distinction between chapter 7 and 13! Pls. check out my piece you when you have a minute.