Filing for Bankruptcy: Chapter 7 vs. Chapter 13

The pandemic has disrupted every part of our lives, including work: Over the last year, many Americans have lost their jobs or seen their hours cut. At the same time, and counterintuitively, bankruptcy filings have decreased. As things begin to return to normal with the release of multiple vaccines, we expect many families will start looking into their legal options to help with their financial struggles.

Every consumer bankruptcy case falls under 1 of 2 options: Chapter 7 or Chapter 13. This article outlines features of each and helps you understand which Chapter filling best fits your situation. We will discuss some specifics regarding housing, vehicles, stimulus money, and bank accounts.

What Your Income and Debts Mean for Your Filing Choices

To file Chapter 7 bankruptcy, your income must be under the average for a household of your size. If it is not, you will have to file Chapter 13. See the table below for the gross median income in Utah as of February 2021.

1 Member - $66,445

2 Members - $72,855

3 Members - $85,507

4 Members - $95,430

5 Members - $104,430

6 Members - $113,430

7 Members - $122,430

8 Members - $131,430

Discharge Unsecured Debts with Chapter 7 Bankruptcy

Given the income limits, if you are a family of 4 and wish to file for Chapter 7 bankruptcy, your combined household income would have to be less than $95,430. For a family of 1, it would need to be less than $66,445.

A Chapter 7 would allow you to get rid of your unsecured debt (such as credit card and medical bills) while allowing you to keep and pay off your secured debt (home or car loans, etc.) items as before. However, you will need to be up to date on your secured debt payments in order to keep the items.

If you have equity in your home, we would need to analyze your current standing and make sure that we are keeping you and your home safe. Keep in mind that Chapter 7 does have a homestead exemption of $42,700 for the head of household and another $42,700 if there is a spouse or partner listed on the loan and living in the household. Therefore, you might qualify for a max homestead exemption of $85,400.

Restructuring Debts with Chapter 13 Bankruptcy

In a Chapter 13 case, the filer will make a monthly payment to the Chapter 13 Trustee, who then pays a portion back to the creditors over a 3- to 5-year period. If you are behind on your mortgage and intend on staying in the home, you can include all the arrears in the bankruptcy and pay them back as part of your monthly bankruptcy payment. You would need to resume all payments upon filing your case and keep up to date with the mortgage payments current going forward.

In a Chapter 13, you will also re-amortize your car loan; it too must be paid over the course of your bankruptcy through the monthly installments. The amount owed per month in a Chapter 13 is dependent upon your income and your non-exempt assets. If you owe any back taxes, filing a Chapter 13 can help reduce the owed interest and penalties and be included in your monthly payments.

How a Bankruptcy Filing Affects Your Housing Situation

While future pandemic relief legislation may change the way housing debt is handled, the below lays out your options as of February 2021.

Bankruptcy for Renters

As laws have been catching up to the impacts of the pandemic, there has been a moratorium on evictions in place. As of January 20, 2021, President Biden extended the eviction moratorium 2 months to March 31. Unless new legislation is passed or a new extension is approved, landlords will be able to evict tenants who are behind on rent after March 31, 2021.

Unfortunately, bankruptcy doesn’t help if you are trying to stay in your current rented house or apartment. If you do get evicted after March 31, 2021, as the laws currently stand, you can list the amount that you owe for rent and get them discharged (a discharged debt can never be collected on again). You will need to find a new place to live, but the debt regarding your previous residence would be gone in the bankruptcy.

Mortgage Forbearance, or Bankruptcy?

Many, if not all, mortgage companies have allowed forbearances on mortgage payments if you follow their guidelines. For those who have not sought a forbearance despite being behind on your house payments, if you wish to stay in the same home, a Chapter 13 bankruptcy can help you bring the arrears current over 3-5 years without losing your property. As mentioned earlier, you would need to resume your house payments (unless you are still in a forbearance) upon filing bankruptcy.

Can I Keep My Vehicle After Filing for Bankruptcy?

Most of us need cars for our day-to-day, but if you’re considering bankruptcy, you may be considering downgrading to a less expensive model. Here’s what to consider based on your situation.

If You’re Behind on Payments

For those who want to keep their vehicle, a Chapter 13 bankruptcy will allow you to do so—but you will have to continue making payments after filing. If you do not want to keep your vehicle, either Chapter will suit your needs. For those who are leasing, you can choose to surrender your vehicle in both Chapter 7 and Chapter 13.

If You’re Current on Payments

The amount of equity (the difference between a car’s value and the balance of your auto loan) may factor into how you want to handle filing if you have kept up with your car payments. If your equity is below $3,000, you could file either Chapter. However, if you have more than $3,000 in equity, your best option is a Chapter 13. If you file a Chapter 7, you risk the Chapter 7 Trustee selling your car, paying you the $3,000 car exemption and using the rest of the money to pay your creditors.

For couples who co-own own a car, you can combine your car exemptions and have $6,000 of equity protection. For those who are leasing, either Chapter will allow you to keep your car, but you will have to continue to make payments after filing.

Handling Cash and Bank Accounts

Especially if you have negative balances in any bank accounts, you should take action before you file bankruptcy to protect your cash as much as possible.

Protecting Your Bank Accounts

If you have debt at the bank or credit union where you keep your money, you need to find a new institution where you do not have any debt, open a bank account, and move all your direct deposits there. You should do this as soon as possible, even if you are not sure whether you will file.

Once you open the new account, take your money out of the institution where you have debt and move it to the new account. You will not be able to close the old account where you have debt; however, if you file bankruptcy, they are very likely to close that account for you. It can be difficult to open a new bank account right after filing, so setting one up before you file is an essential step.

What About My Stimulus Payments?

Stimulus money is protected from your bankruptcy since it does not count as income. However, if your stimulus funds are deposited at an institution where you currently have debt, the bank or credit union can use that money to pay those debts.

Bankruptcy Is Confusing. We Can Help.

Especially with the potential for more major legislation on the horizon, it can be hard to determine which Chapter you should file. While the above issues are important to most filers, this blog post barely scratches the surface of these topics. We recommend speaking to an attorney to learn the nuances of each type of bankruptcy filing. Our team offers compassionate guidance and can help explain the process and what you should expect after you file.

Schedule a free consultation by calling (800) 265-2314 or email Attorney Russell Evans today for one-on-one help.