There are a variety of differences between Chapter 7 and Chapter 13 bankruptcies from the point of view of the debtor. The primary difference is that Chapter 7 involves liquidating (selling) the debtor’s assets and using the proceeds to pay back the debtor’s debts, while Chapter 13 requires the debtor to use his or her disposable income for the next three to five years to pay off creditors. The different processes in Chapter 7 versus Chapter 13 affect creditors as well as debtors.
One of the differences between Chapter 7 and Chapter 13 from the creditors’ perspective is that Chapter 7 bankruptcy usually results in more of a loss for creditors. Because individuals filing for bankruptcy are financially stressed, the amount of money generated from Chapter 7 liquidation is usually not enough to pay back their debts in full. The deficit represents a loss to the creditors in the form of unpaid debt. A Chapter 13 repayment plan may also result in a loss to creditors but that loss is typically less than the loss incurred in a Chapter 7 case is. Because Chapter 13 involves a higher percentage of debt payment, it is favored over Chapter 7 where practicable.
The Chapter 7 “means test” was instituted in order to prevent debtors from filing for Chapter 7 if they have enough disposable income to either file under Chapter 13 or avoid bankruptcy altogether. The means test first asks whether the debtor’s average monthly household income for the prior six months is less than the state median monthly income for a household of the same size. If the answer is yes, the debtor has passed the means test and may file for Chapter 7. If the answer is no, the debtor must subtract certain necessary expenses, such as housing and transportation, from his or her income in order to calculate his or her disposable monthly income. This disposable monthly income is then compared to the debtor’s debts in order to determine whether the debtor makes enough money to handle his or her debts without filing for Chapter 7 bankruptcy. If it is determined that the debtor does make enough money to handle his or her debts without filing for Chapter 7 bankruptcy, then the debtor is not allowed to file for Chapter 7 but may file for Chapter 13 instead if eligible.
Regardless of whether you qualify for Chapter 7, your bankruptcy options are best considered in consultation with an attorney. If you do qualify for Chapter 7, there may still be reasons why it might be more advantageous to file under a different Chapter. If you do not qualify for Chapter 7, there are strategic decisions to make, such as how to handle your small business in the bankruptcy process, whether to file jointly with your spouse and whether to use a non-bankruptcy option to address your debt.
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The Chapter 7 bankruptcy process is filled with specific deadlines and filing requirements. In order to protect your rights, it is important to work with an experienced Minneapolis bankruptcy lawyer who will work hard to get you the bankruptcy relief you deserve.
To find out more about filing for bankruptcy in Minnesota, please read our FREE book, What You Need to Know About Filing Bankruptcy in Minnesota, and please call our Minneapolis bankruptcy law firm at 952.388.2942 or 800.619.8991.