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Chapter 7 and chapter 13 bankruptcy are common individual bankruptcies you can file to get some relief if you’re struggling to repay debt. Chapter 7 helps you discharge certain debts, while chapter 13 primarily helps you reorganize your debt.
If you’ve used chapter 7 bankruptcy to discharge debts in the past and need additional time to catch up on debts that weren’t discharged — or need a more manageable repayment plan, filing chapter 13 afterward could make sense in a few situations. Choosing this route means you must wait four years to file after filing chapter 7.
What are the differences between chapter 7 and chapter 13 bankruptcy?
Chapter 7 bankruptcy allows you to become debt-free through what’s often referred to as a liquidation process. Your debt is discharged, and 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. Many states have a set of exemptions. Sometimes, you can choose between your state and federal bankruptcy exemptions.
Chapter 13 bankruptcy is a way to reorganize your debt. It involves repaying none, some or all of your debt over three to five years. In chapter 13, your debts aren’t discharged right after filing, though some of them can be discharged once you’ve completed your repayment plan.
With chapter 13, most or all of your creditors are lumped together into one large pool. You make monthly payments to a lawyer — called a trustee — assigned to your case. The trustee distributes your payment to the creditors.
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 chapter 7 is also referred to as chapter 20 bankruptcy. You won’t receive a discharge when filing chapter 20, since you aren’t waiting the full four years. This filing could give you the time you need to pay down debt.
How soon can you file for chapter 13 after chapter 7 bankruptcy?
To get debts discharged through chapter 13, you must wait four years after filing a chapter 7 bankruptcy.
You can file for chapter 13 before four years if no debts were discharged in the chapter 7 filing. 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 chapter 13, paying very little to your creditors and yet still discharging the remaining balances owed.
“This may be a good option for people who have student loan debt, certain types of income tax debt and child support payments to make,” said Sean Fox, president of Freedom Debt Relief. “These things cannot get discharged in a Chapter 7 bankruptcy.”
When is filing for chapter 13 after chapter 7 a good idea?
Here are some common reasons you might file for chapter 13 after filing for chapter 7:
- Back taxes: 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.
- Student debt: You may also use the five years provided under chapter 13 to pay back items such as student debt or alimony arrears that weren’t discharged in your chapter 7 case. “If you have large amounts of student loans, filing for chapter 13 allows you to avoid wage garnishments,” says Rosenblum. “Rather than making your regular student loan payment, you make your chapter 13 plan payment, which will be lower.”
- Late payments: A chapter 7 bankruptcy allows the holder of your mortgage to foreclose, so you may want to consider filing for chapter 13 to give yourself more time to catch up on your mortgage payments. Typically, under a chapter 13 bankruptcy, you’re allowed to hold onto the property that you’re making payments on.
- Lien stripping: This is 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 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 less than three years overdue. Student loans — one of Americans’ most significant debts — are also not dischargeable.
If you have dischargeable debt that you still need to deal with after filing for chapter 7, you may be able to file chapter 13. Before you do so, make sure you’ve evaluated how it will affect your long-term finances.