Choosing Between Chapter 13 and Chapter 7 Bankruptcy

Learn more about:

Personal Bankruptcy: What Massachusetts Residents Need to Know

There are two types of personal bankruptcy that individuals in the U.S., and in Massachusetts, usually file, Chapter 7 and Chapter 13. One of the main questions people ask is which of the two is best for them.

First, the basics: Chapter 13 bankruptcy is a reorganization. Under Chapter 13, the court approves your plan to partially repay your debts. This plan has a duration of three to five years. At its conclusion, balances on most debts, such as credit cards, are forgiven.

Chapter 7 bankruptcy is a liquidation. Liquidation enables you to discharge most of your debts in exchange for giving up your non-exempt property. But since most people who seek bankruptcy relief have little or no non-exempt property, Chapter 7 enables them to keep their property and receive a discharge of debts.

When a bankruptcy case is filed in Massachusetts, a bankruptcy debtor has a choice between Federal and Massachusetts bankruptcy exemptions. Exemption is the equity in the property which a person who files for bankruptcy is entitled to keep. For example, if a debtor owns a residence in Massachusetts with up to $500,000 in equity and records a declaration of homestead, he or she can use a homestead exemption. In Massachusetts, a properly recorded homestead exemption allows bankruptcy debtors to keep up to $500,000 of equity in their primary residence.

Understanding how bankruptcy exemptions work is sometimes a complicated matter, particularly in Massachusetts, where the homestead law has recently changed, making it more difficult to properly record a homestead. Massachusetts bankruptcy debtor with substantial assets, including primary residence and individual retirement accounts, should consult with an experienced bankruptcy attorney to determine applicability of Massachusetts exemptions in a personal bankruptcy filing.

Both Chapter 13 and Chapter 7 are popular types of personal bankruptcy filings. So why choose one over the other?

First, sometimes you don’t have a choice. Generally, if you can pay a portion of your debts, you are required to pay them through Chapter 13. Most people who have above-median income find themselves in this group. In Massachusetts, the median income by family size (for cases filed after March 15, 2010):

  • Family of one: $53,315
  • Family of two: $69,204
  • Family of three: $82,297
  • Family of four: $99,293
  • Add $7,500 for each additional family member (for cases filed after April 1, 2010)

However, median income levels are not the only factor considered. This is especially important if you are above the income thresholds. You still may qualify to file Chapter 7 if you pass the Means Test. A means test takes into consideration median income level, your actual net income after payment of taxes and other deductions from your paycheck, standard deductions for living expenses such as food and transportation, your mortgage and car loan payments, and other factors. If you are earning more than the median income, don’t despair. You can still qualify for Chapter 7 bankruptcy. Contact the Law Office of Vladimir von Timroth to arrange a free consultation.

If you qualify for Chapter 7, is this your best course of action? That depends on your specific situation. Although Chapter 7 bankruptcy becomes part of your credit report for 10 years, this does not mean that you will not be able to obtain credit for 10 years. The credit of many people who file under Chapter 7 can be restored within just a few years of a bankruptcy case.

Furthermore, it is common for people who are considering a bankruptcy filing to have already defaulted on their debts, or to do so shortly. This means that even without filing for bankruptcy, your credit score is significantly reduced. Furthermore, it may take more than 10 years for all your defaulted loans to come off your credit report, as various debt collectors would wrongfully continue to report your unpaid debts.

If you do qualify for Chapter 7, however, there may be reasons for you to file under Chapter 13. Unlike Chapter 7, Chapter 13 bankruptcy allows you to:

  • To reinstate mortgage and car loans; stop foreclosure and repossessions by proposing a payment plan to your creditors.
  • Solve tax debt problems, some of which only Chapter 13 can resolve.
  • Discharge certain debts arising out of orders of family court.

From the standpoint of expense, Chapter 7 normally costs you less, because under Chapter 13 you must make a monthly payment. Chapter 7 includes no such expense. Also, you normally pay less in attorney’s fees for Chapter 7. So qualifying for Chapter 7 can have persuasive advantages.

The first step in addressing this important matter is a free consultation. Massachusetts residents interested in more information about Chapter 7 and Chapter 13 personal bankruptcy can reach Attorney von Timroth at 508-753-2006.

Vladimir von Timroth has two offices in the Boston, MA and Worcester, MA areas:

405 Grove Street, Suite 204
Worcester, MA 01605

251 Harvard Street
Suite 4, Brookline, MA 02446