Consult a Bankruptcy Attorney to Learn the Right Choice for You
If you’re struggling with overwhelming debt, you may be considering filing for bankruptcy.
This can be a smart way to get your life back on track and receive some much-needed debt relief.
When researching consumer bankruptcy, you’ve probably come across the terms Chapter 7 and Chapter 13. These are the two most commonly used chapters of bankruptcy used by single filers, married couples, and small business owners who are struggling with debt. While they have some similarities, they also have several differences.
If you’re trying to decide which is the best option for you, it’s crucial you speak with a trusted bankruptcy law firm, such as Denver’s Wink & Wink. They’ll review your case and help you make the right call.
Let’s take a look at some of the key differences between Chapter 7 and Chapter 13 bankruptcy.
Chapter 7 Bankruptcy
Chapter 7 is the most common chapter of bankruptcy. In Chapter 7, you can discharge credit card debt, medical debt, personal loans, and other forms of unsecured debt as well as remove your liability on secured debts, like your mortgage and car loans.
In Chapter 7, your debts are discharged pretty quickly, usually 4-6 months after you file your bankruptcy case. It is often called “liquidation bankruptcy” because you are not on any payment plan. Rather, you get to keep all of your “exempt” property, and any “non-exempt” property is liquidated by the bankruptcy trustee for the benefit of your creditors.
In reality, most people who file Chapter 7 bankruptcy keep everything they own. This is because the bankruptcy exemptions protect many assets.
Here are some examples of asset exemptions in Colorado. These include the sweeping changes passed to Colorado’s exemption laws in 2022 from Senate Bill 022-085, which amended portions of Colorado Revised Statutes §§ 13-54-102, 13-54-102.5, 8-80-103, 38-41-201, 38-41-205 and 38-41-201.7. As a result of these changes, Coloradans now enjoy some of the most significant property protection in the country.
- Your home:up to $250,000 of equity (or $350,000 if you, your spouse, or a dependent in the home is disabled or older than 59);
- Clothing: up to $2,000 (based on resale value, what you could get for it, not what it cost new);
- Household goods: up to $6,000;
- Tools or instruments related to your job: up to $60,000 for your primary source of income; or $20,000 for a secondary source of income;
- Pensions and benefits related to welfare, social security, unemployment, and other things: typically 100% protected;
- Jewelry: up to $2,500;
- Motor vehicle: up to $15,000 in two vehicles (or $25,000 if you, your spouse, or a dependent in the home is disabled or older than 59); and
- Retirement accounts, such as a 401(k), IRA, etc.: typically 100% protected.
Most people who file Chapter 7 bankruptcy in Colorado keep everything they own. However, you often cannot manipulate your secured debts in Chapter 7. Chapter 13, on the other hand, gives you the ability to catch up on missed mortgage or car payments over time and, in some cases, reduce the amount owed on certain secured debts, like second mortgages and car loans.
Whether you qualify for Chapter 7 bankruptcy is determined by your gross household income. Each state has median income figures for every household size, and if your income is lower than the median, you can file a Chapter 7 bankruptcy. If not, Chapter 7 may not be available. Instead, Chapter 13 may be the better fit.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is often used by single filers, married couples, and small business owners to discharge the same debts as in Chapter 7. Chapter 13 is used by people who have income too high for Chapter 7, and also by people looking to take advantage of some of the extra features of Chapter 13.
Chapter 13 has some additional debts that can be discharged that Chapter 7 cannot, such as property settlement awards following divorce. There are also some special features of Chapter 13 that can allow you to manipulate secured debts, like second mortgages and car loans.
Chapter 13 puts you into a monthly payment plan for three to five years. Your payment is determined by your income and expenses OR by the reason you are filing Chapter 13 in the first place, such as to pay for unprotected assets, make up missed mortgage payments or repay tax debt.
Many people who file Chapter 13 are in that chapter because their income is too high to file Chapter 7. In that case, the Chapter 13 payment is determined by a means test, which allows you to take deductions from your gross monthly income to arrive at the amount you will be required to pay each month. Once you complete those payments, your debts are discharged—just like in Chapter 7.
The means test can be very complicated, and you will get the best results by using an experienced bankruptcy attorney who knows how the local courts and Chapter 13 trustees operate. That’s why it’s recommended you contact Wink & Wink, bankruptcy lawyers based in Denver, Colorado, with over ten years of experience, to make sure you get what’s right for your case.
Chapter 13 bankruptcy can be a very good option for people who have income too high to file Chapter 7 or for people who will lose property in Chapter 7 which they can pay for and keep in Chapter 13. In many cases, they will pay back only a fraction of their debts, and they will be protected from debt collection the entire time they are in the repayment plan.
Even people with very high incomes often choose Chapter 13 to repay all of their debts because of the ability to lock in your total debt amount when you file and repay the total over five years, without further interest accruing during the repayment period. In some cases, you can rehabilitate your credit while in Chapter 13 bankruptcy and refinance your mortgage to augment what you have to pay into your Chapter 13 plan (reducing your monthly requirement), or pay it off early.
However, Chapter 13 is not only for people who have income too high for Chapter 7. There are some very good reasons to file a Chapter 13 even though you qualify for Chapter 7.
Reasons to File Chapter 13 Even If You Qualify for Chapter 7
- Lien Stripping – If you have a second mortgage, home equity line, or even a third mortgage on your home (“junior liens”), those loans may be stripped off—meaning you won’t have to pay them or only a small amount—in Chapter 13 bankruptcy. In order to strip off a second mortgage or similar, the value of your house must be less than what you owe on the primary, or first, mortgage. You cannot strip off second (or third) mortgages in Chapter 7; this is only available in Chapter 13.
- Cure Mortgage Arrears – Chapter 13 bankruptcy allows you to take up to five years to repay overdue mortgage payments (called “arrears”). This can be a way to save your home from foreclosure if your mortgage company refuses to accept partial payments, because they will be forced to take partial payments in your Chapter 13 bankruptcy. You can also cure arrears on your HOA payment and even car loans.
- Back Taxes and Back Child Support – Chapter 13 can also give you five years to repay back taxes and child support without the pressure of ongoing levies or garnishments.
- Non-Exempt Assets – Sometimes people who otherwise qualify for Chapter 7 have non-exempt assets they wish to keep. Some examples of non-exempt assets include antiques, certain valuable items (such as a coin or stamp collection), musical instruments, and additional motor vehicles and homes. Chapter 13 can give you up to five years to pay for such assets instead of having to surrender them or pay for them over a short period of time in Chapter 7. For instance, if you have non-exempt equity in your home of $10,000 (Colorado’s homestead exemption allows you to keep up to $250,000 equity as an exempt asset), you can pay off the non-exempt portion over 60 payments and pay approximately $250-$300 per month into a Chapter 13 payment plan to keep your home, rather than surrender it in a Chapter 7 bankruptcy.
- Cram Down or Refinance of a Car Loan – If your car loan is more than two-and-a-half years old, and your car is worth a good deal less than what you still owe, Chapter 13 gives you the ability to cram down the loan amount to the present value of your vehicle. Even if this is not an option, Chapter 13 can allow you to refinance your auto loan(s) over a longer period of time to lower your payments.
Which Is Right For You: Chapter 7 or Chapter 13 Bankruptcy?
Both Chapter 7 and Chapter 13 bankruptcy offer meaningful debt relief. The right chapter for you depends on your financial situation and what your goals are concerning any non-exempt property you own and your secured property (houses and cars).
To begin getting much-needed debt relief for yourself or your small business, contact Colorado bankruptcy attorneys Wink & Wink for a free consultation. They can be contacted online or by calling 303-410-1720. Get started today.