Filing for bankruptcy is a way to deal with mounting debts you can no longer manage. But once you’ve opted for this approach to wiping out debts, there are limits surrounding when you can file again. If you’ve used Chapter 7 bankruptcy specifically to discharge debts in the past, you must wait eight years before filing another Chapter 7 case.
But that doesn’t mean you’re out of options if you’re facing debt again. Chapter 13 bankruptcy, often referred to as a wage earner’s plan, is another potential route to take, and you only have to wait four years to file after filing Chapter 7.
What is Chapter 7 bankruptcy?
Chapter 7 bankruptcy allows you to become debt-free through what’s often referred to as a liquidation process. When using this approach, your debt is discharged, but your nonexempt property is typically sold, with the proceeds distributed to creditors.
Though it varies by state of residency, personal possessions that may be considered nonexempt and thus sold to cover your debts could include your home, pension, car, personal belongings, coin collection and even jewelry. Each state has a set of its own exemptions, and in some cases you’re allowed to choose between your state exemptions and federal bankruptcy exemptions laid out by Congress.
In a Chapter 7 bankruptcy, your debts are divided into two major categories: secured and unsecured debts. Secured debts are debts that are secured by an asset such as a home mortgage or car loan. Unsecured debts include medical bills, lawsuit judgments and credit card debts.
With Chapter 7 bankruptcy, you are released from any obligations or liability with regard to secured debt — for example, the mortgage of your property — but the creditor still has the right to take back the property. This means that they may foreclose on your home or repossess your car.
With unsecured debt, you are again released from any liability to pay the debts. Unsecured creditors are paid from the proceeds of the sale of any nonexempt assets you have and are paid in order of priority.
However, some debts can’t be discharged through Chapter 7; these are known as priority debts and may include child support, spousal support, money you owe to employees and tax debts. Priority debts are also repaid first from the proceeds of your assets during the bankruptcy process.
What is Chapter 13 bankruptcy?
Chapter 13 bankruptcy is a way to reorganize your debt. It involves repaying none, some or all of your debt over the course of three to five years. One important difference between Chapter 13 and Chapter 7 bankruptcy is that in Chapter 13, your debts aren’t discharged and you’re still liable to pay them.
With Chapter 13, most or all of your creditors are lumped together into one large pool. Then you make payments each month to a lawyer who’s assigned to your case, called a trustee. The trustee distributes your payment to the creditors.
“In Chapter 13, you can reduce the amount owed on secured loans, reduce interest rates, re-amortize loans for a lower monthly payment, remove certain liens, extend the time to pay back taxes, reduce the amount owed on unsecured loans sometimes down to zero and legally break leases,” says attorney Dai Rosenblum of Dai Rosenblum Bankruptcy. Because a Chapter 13 can extend up to five years, he says that many people use it to get caught up on their mortgage.
When you proceed with a Chapter 13 case, you must file a plan detailing how some or all of the debts will be repaid over time. In addition, you or your attorney, in conjunction with the trustee for your case, will determine a reasonable amount that you can afford to pay back to creditors. That amount is based on your assets, monthly income and monthly expenses.
How often can you file for bankruptcy?
The frequency of applying for bankruptcy depends on which type of bankruptcy you’re filing, something known as the 2-4-6-8 rule. Here’s a breakdown:
- Filing Chapter 13 after Chapter 13: two years.
- Filing Chapter 13 after Chapter 7: four years.
- Filing Chapter 7 after Chapter 13: six years.
- Filing Chapter 7 after Chapter 7: eight years.
Filing Chapter 13 immediately after filing Chapter 7 bankruptcy is also referred to as Chapter 20 bankruptcy. You will not receive a discharge when filing Chapter 20, since you are not waiting the full four years between Chapter 7 and Chapter 13, but this type of filing could give you the time you need to pay down debt.
How soon can you file for Chapter 13 after Chapter 7 bankruptcy?
In order to get debts discharged through Chapter 13, you must wait four years after filing a Chapter 7 bankruptcy.
You can file for a Chapter 13 before four years if no debts were discharged in the Chapter 7 filing, but if you had debts discharged in Chapter 7 and want to have debts discharged in Chapter 13, you must wait four years.
Should I file for Chapter 13 after filing for Chapter 7?
If you file Chapter 13 at least four years after filing Chapter 7, you can have a very low monthly Chapter 13 payment plan and receive a full discharge of all remaining balances after you complete the three- to five-year plan. For example, you could pay as little as $100 a month for three years inside of a Chapter 13, paying very little to your creditors and yet still discharging the remaining balances owed.
Here are some common reasons you might file for Chapter 13 after filing for Chapter 7:
- If you discharge all your debts but still have back taxes that weren’t dischargeable, Chapter 13 will give you five years to pay those taxes.
- You may also use those five years to pay back items like student debt or alimony arrears that weren’t discharged in your Chapter 7 case.
- A Chapter 7 bankruptcy still allows the holder of your mortgage to foreclose, so you may want to consider filing Chapter 13 to give yourself more time to catch up on your mortgage payments.
- You may want to utilize lien stripping, or the process of eliminating junior liens like second mortgages. Not all courts allow this, so consult a bankruptcy professional to see if this makes sense for your situation.
The bottom line
Bankruptcy can be a reasonable approach to resolving debt, but keep in mind that this approach doesn’t discharge or eliminate all kinds of debt. Alimony and child support, for example, aren’t dischargeable through the bankruptcy process, nor are income taxes that are less than three years overdue. And student loans — one of the most significant debts Americans face — are also not dischargeable.
There are benefits and drawbacks associated with each of the various bankruptcy options, so consult a bankruptcy advisor before determining whether to file Chapter 7 or Chapter 13.