The primary difference between a Chapter 7 bankruptcy and a Chapter 13 bankruptcy has to do with the amount of your Household Income. Generally speaking if your annual household income is less than the average median income in Massachusetts it means that you probably can’t afford to pay your debts and as a result that you qualify for Chapter 7 bankruptcy protection and that your debts will be discharged (you don’t have to pay them).
But, what if your annual household income is greater than the average median income in Massachusetts? Well, this means that you probably can afford to pay some portion of your debts through a Chapter 13 bankruptcy payment plan. If you make more than the allowable median income based on household size, you will have to take the bankruptcy “means test.” In Massachusetts, the allowable median income by family size (for cases filed after May 1, 2012) is:
- Family of one: $55,185
- Family of two: $66,200
- Family of three: $82,873
- Family of four: $102,194
- Add $7,500 for each additional family member.
Filing under Chapter 13 bankruptcy allows you to create a payment plan that you will pay into on a regular monthly basis. To some people a Chapter 13 bankruptcy less attractive than a Chapter 7 bankruptcy, because the Chapter 13 bankruptcy requires you to pay money into a plan whereas a Chapter 7 bankruptcy just wipes out all your dischargeable debts. And, it is true that Chapter 7 bankruptcy can be better in many cases. However, a Chapter 13 bankruptcy plan has many significant benefits that a Chapter 7 bankruptcy does not have. Some of those benefits are:
- Chapter 13 bankruptcy can be used to defend against foreclosure, allowing you to satisfy unpaid mortgage bills (or tax bills) over time when your lender is demanding that you pay in one lump sum in order to stop foreclosure.
- The cost of the Chapter 13 bankruptcy court filing fee is often lower than than the Chapter 7 bankruptcy court filing fee, especially under the new bankruptcy law. People often want to file a bankruptcy case quickly; Chapter 13 bankruptcy can often be the way to do this.
- Chapter 13 bankruptcy stays on your credit report for less time than a Chapter 7 bankruptcy does (7 years instead of 10 years).
- There is no reaffirmation in Chapter 13 bankruptcy. This avoids a sometimes problematic situation related to car loans in Chapter 7 bankruptcy in which you have to prove to the bankruptcy court that you do have enough money to continue paying your car loan even though you are simultaneously claiming that you don’t have enough money to pay your total debts. In Chapter 13 bankruptcy you don’t have to deal with the reaffirmation process to keep cars for which you have a loan.
- No one ever loses property in a Chapter 13 bankruptcy. It is not a “liquidation” chapter, it is a “reorganization” chapter.
- Chapter 13 bankruptcy monthly plan payments are often quite low, allowing you to pay pennies on the dollar to your unsecured creditors, and then getting a discharge of all the remaining unpaid unsecured debt after the completion of your plan payment period.