Which Bankruptcy Chapter is Right for Me?
June 10, 2020
General “Rules of Thumb” for Individuals When Selecting The Appropriate Bankruptcy Chapter
Generally, an individual debtor will prefer Chapter 7 over Chapter 13. A Chapter 7 is less expensive, faster and enables the debtor to achieve a discharge much sooner.
To qualify for a Chapter 7 bankruptcy, your family income must be less than the average family income in the state and county in which you live. For example, the median (middle) income of a family of 3 living in Alabama (in 2020) is $68,554 and for a family of 4 is $82,991.
Generally, an individual debtor will prefer Chapter 13 over Chapter 11. Though a Chapter 13 is more expensive and slower than a Chapter 7, a Chapter 13 is less expensive and faster than a Chapter 11.
To file a Chapter 13 Bankruptcy, (a) you must be an individual (no corporation, business or partnership), though you may be self-employed or operating an unincorporated business, (b) you must have a regular income, (c) you must have disposable income at the end of each month (your income is greater than your reasonable living expenses), (d) as of 2020, your unsecured debts may not exceed $394,725, and (e) as of 2020, your secured debts may not exceed $1,184,200.
Chapter 13 reorganization offers individuals a number of advantages over liquidation under chapter 7, including (a) the opportunity to save your home from foreclosure; (b) the election to reschedule secured debts (other than a mortgage for your primary residence) and extend those debts over the life of the chapter 13 plan (either 3 or 5 years); (c) the ability to potentially “strip” away junior liens from property; (d) extending “automatic stay” protections to third-parties who are liable with you (co-debtors or co-signers) on "consumer debts;" and (e) acting as a consolidation loan under which you make the plan payments to the chapter 13 trustee who then distributes payments to your creditors – meaning you will have no direct contact with creditors while under chapter 13 protection.
If you don’t meet the requirements for either Chapter 7 or Chapter 13, then you are left with Chapter 11 as your only option.