Personal Finance
Chapter 7 or Chapter 13? What Really Decides How You File
Bankruptcy attorney Barry Levine explains why income, mortgage arrears and earlier discharges, not speed, decide which chapter fits a household.
Demystifying Bankruptcy: Chapter 7 vs Chapter 13 Explained.
Video from Barry Levine.
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How do you know whether to file Chapter 7 or Chapter 13 bankruptcy?
For most individuals the choice comes down to income and what they need to protect. A household under the median income usually files Chapter 7 and can be discharged in about four months. Higher earners, people behind on a mortgage and anyone with a Chapter 7 discharge in the last eight years usually look at a Chapter 13 repayment plan instead.
Barry Levine has spent more than four decades representing people and small businesses through bankruptcy, and he hears the same confusion again and again. People know the labels Chapter 7 and Chapter 13, but they assume one is simply faster and the other is worse. In a conversation with Sam Heninger, he laid out what actually separates the two.
The answer is less about preference than about facts. Household income, missed mortgage payments and the date of any earlier discharge usually decide the route before a client says a word about which chapter they would like. Getting those facts straight early saves people from choosing a path they cannot finish.
Levine also covered what bankruptcy can and cannot wipe away, why the collection process is slower than most people fear, and why he steers closely held companies away from Chapter 7. His view throughout is practical: understand the rules first, then decide how much creditor pressure you can realistically live with.
Key takeaways
- Chapter 7 is income driven: a household under the median usually files it and is discharged in about four months.
- Chapter 13 suits higher earners and homeowners behind on a mortgage who need five years to pay the arrears.
- Anyone discharged in Chapter 7 must wait eight years to file another, which pushes some repeat filers into Chapter 13.
- Trust fund taxes and most student loans usually survive a discharge, so they need planning before anyone files.
1. Income decides most Chapter 7 cases
For individuals, Levine says, the decision is usually between Chapter 7 and Chapter 13, and the first test is income. Chapter 7 is strictly income driven. If a household earns less than the median, it files a Chapter 7 and nobody questions it. From filing the case to receiving a discharge, the process typically takes about four months.
Higher earners are a different story. When income sits above the median, the means test comes into play, and its result sets how much the filer must devote to unsecured creditors. That figure is paid over 60 months, so a monthly amount of 100 dollars becomes a plan worth 6,000 dollars across the life of the case.
Levine has represented clients who earn far more than most people imagine and still need relief. For them the question is not whether bankruptcy is available but which form it takes. The means test answers that, and it removes much of the guesswork people bring to their first meeting with an attorney.
2. Why Chapter 13 is about time, not punishment
The second driver of Chapter 13 is a mortgage in arrears. Levine notes that foreclosures largely paused during COVID and are now picking up again. A homeowner who has missed two years of payments can file a Chapter 13, and the automatic stay stops the foreclosure while the arrears are paid over five years.
The catch is that the plan only works if the filer also keeps up with current expenses, including the ongoing mortgage payment. Levine describes a recent client with five children who filed to stop a foreclosure and now pays about 60,000 dollars in arrears alongside his regular payments. It can be done, he says, but it is tough.
There is also a third route into Chapter 13. Someone who received a Chapter 7 discharge must wait eight years before filing another. Levine has filed for the same person four times over his career, and he now sees people buried in new debt who choose Chapter 13 because they cannot yet qualify for another Chapter 7.
3. What a discharge will and will not clear
A discharge wipes out most unsecured debt and, in some circumstances, personal income tax. It does not touch unpaid trust fund taxes. If a company fails to pay employee withholding, sales tax or meals tax, its principal is personally liable, and that liability survives. Student loans have long been close to impossible to discharge, though Levine sees the government starting to weigh repayment history.
Secured debts work differently. After a foreclosure, a Chapter 7 discharge can wipe out the deficiency between what was owed and what the house brought at auction. Filers who want to keep a car or a home can reaffirm the debt, which makes it survive the discharge, or simply keep paying and retain the asset.
Much of Levine's job is correcting what clients picked up from a friend or an internet search. Trustees do not come to the house to take furniture, and the 341 meeting mostly repeats questions already answered in the petition. Readers who want his longer view can turn to his book Personal Bankruptcy Through The Looking Glass, drawn from almost forty years of representing debtors.
