Qualify For Both Chapter 7 & Chapter 13 Bankruptcy? Here’s How To Decide Which To File

In Arizona, chapter 7 bankruptcy is the top-filed form of consumer bankruptcy, followed by chapter 13 bankruptcy. They serve different purposes, but ultimately share powerful debt relief in common. They also have different eligibility requirements, such as prior filing waiting periods and income restrictions. Despite all of this, it is possible for a debtor to qualify for both chapters of bankruptcy. When this happens, how should they decide between chapter 7 and chapter 13? Read on for how to come to an answer to this question if you find yourself in these circumstances. For your free consultation with a dedicated member of our Arizona bankruptcy team, call 480-833-8000.

Dual Income Eligibility

How is it possible qualify for both chapter 7 and chapter 13 bankruptcy at the same time? Chapter 7 bankruptcy requires that a debtor’s household income fall below the state median household income threshold, or they be able to prove they don’t have enough disposable income to pay their debts with the means test. Chapter 13 bankruptcy requires that a debtor have enough disposable income to pay all of their debts besides unsecured non-priority debts within either 3 or 5 years. Here, a debtor might earn less than the state median income for their household size, qualifying them for chapter 7 bankruptcy, but earn enough to pay off their secured and priority debts within 3 years, qualifying them for chapter 13 bankruptcy. But the means test creates many opportunities for errors, especially for inexperienced debtors, and filing the wrong chapter by mistake can have disastrous results. 

What Types of Debts Do I Have?

If it has been established that you qualify for both chapters of bankruptcy, you should review your debts to see if both chapters will actually be effective on them. Chapter 7 bankruptcy only clears unsecured debts. Some of the most common examples of these include credit cards, medical bills, and personal loans. But it doesn’t clear a debtor’s obligation to pay secured and priority debts. Any relief it provides from these debts due to the automatic stay will only be temporary. Chapter 13 is almost the opposite in how it discharges debts. A debtor can only file if they can pay their secured and priority debts in full during the payment plan, with unsecured debts only paid as much as they can afford. Those will be cleared at discharge if mandatory debts have been paid in full. So if you qualify for both and you primarily have unsecured debt, chapter 7 will likely be faster and cheaper for you than chapter 13 bankruptcy. On the other hand, if you mostly have secured and priority debt, filing for chapter 7 bankruptcy will only be a brief reprieve from larger debt issues, and chapter 13 could actually get to the root of the problem. There are several special factors that can affect whether a debt is dischargeable in bankruptcy. An experienced bankruptcy lawyer can review your potential filing to determine if any of these apply. 

Will My Assets Be Safe in Bankruptcy?

After determining that your income qualifies you for your chosen chapter of bankruptcy, you should make sure that all of your assets would be safe if you filed. In chapter 7 bankruptcy, any assets that don’t have exemptions applied to them can be taken and sold at auction by the bankruptcy trustee to pay debts. In chapter 13 bankruptcy, non-exempt assets could impact how much you must pay into your payment plan, but only if it isn’t paid in full. If you qualify for both chapters of bankruptcy, at-risk assets in chapter 7 might not even be relevant in chapter 13. But this all depends on your unique circumstances. Review your overall financial situation, including all of your assets, with a bankruptcy attorney before filing either type of bankruptcy petition. 

How Long Do I Want to Be in an Active Bankruptcy Case?

You may want bankruptcy to be over and done with as soon as possible, or your situation could benefit from longer protection from the automatic stay. This could be a huge factor in your decision between chapter 7 and chapter 13 bankruptcy. The automatic stay stops a wide range of collection methods, such as wage garnishments, repossessions, and creditor lawsuits. This protection lasts until the case is discharged (or dismissed), which takes much longer in chapter 13 bankruptcy than in chapter 7. A chapter 7 case will generally last somewhere between 3 and 6 months, while a chapter 13 case always finishes in either 3 or 5 years. How long the payment plan lasts depends on where the debtor’s income falls on the median income threshold. So maybe your wages are being garnished for a priority debt, such as for student loans, and you want the break in payments for years instead of months, making chapter 13 the better option. But if your wages are being garnished for an unsecured debt, like a maxed-out credit card, chapter 7 bankruptcy can clear it more efficiently. 

You may also have financial goals you wish to accomplish that can’t be completed during bankruptcy. You won’t be able to open most new lines of credit until your case is discharged, and will need permission from the trustee for certain purchases during chapter 13 bankruptcy. Another major consideration is whether you wish to buy a home after bankruptcy. There are waiting periods in place for how long a bankruptcy debtor must wait to qualify for a home mortgage. For chapter 7 debtors, the clock begins running at discharge, which should occur several months after filing. For chapter 13 debtors, the clock begins at filing, as long as the debtor makes their payments on time. The waiting periods are generally shorter after chapter 13 bankruptcy, and conventional home loans have longer waiting periods than VA, USDA, and FHA home loans. This could make chapter 13 the preferable choice, or you may be better served by wiping the slate clean with chapter 7 and utilizing the longer waiting period to rebuild your credit. 

Discuss How These Factors Apply to Your Situation with an Experienced Arizona Bankruptcy Lawyer

If you’re overwhelmed by debt, qualifying for both chapter 7 and chapter 13 bankruptcy is a much preferable position than qualifying for neither. This gives you more flexibility in how you address your debt, but it can also create more doubt and confusion throughout the process. You could even end up having regrets about your case if you end up learning about lost opportunities through the other bankruptcy chapter after the fact. Too many debtors don’t get the most out of their bankruptcy cases because they are too intimidated to seek assistance from a professional. We remove the risk of consulting with a dedicated Arizona bankruptcy lawyer by offering free consultations by phone. If you qualify for both chapter 7 and chapter 13 bankruptcy, there’s a good chance you also qualify for our Zero Down payment plan option. Either way, you can confirm your eligibility and get your bankruptcy questions answered without even leaving the house. Schedule your free consultation today by calling 480-833-8000.