Chapter 7 vs Chapter 13 in New York

Chapter 7 vs Chapter 13

Sometimes, despite their best efforts, New Yorkers find themselves in serious debt. Even after intense budgeting, credit counseling, and downsizing from a home to an apartment, they’re barely able to make the minimum payments on their credit cards, medical bills, and student loans each month.

If this sounds like you, there is hope. The United States bankruptcy system was designed to give honest debtors a chance to regain financial stability after setbacks like job loss, illness, or a personal crisis like divorce. In this blog, we’ll explain the difference between filing Chapter 7 vs. Chapter 13 of the U.S. bankruptcy code, so that you can better determine which one is right for you.

Chapter 7 

Chapter 7 bankruptcy is also known as the ‘fresh start’ bankruptcy because it enables people who follow the conditions of their case to get a discharge from all of their unsecured debts and start over in a matter of months. Examples of unsecured debts include:

  • Credit card debt
  • Personal loans and lines of credit
  • Medical bills
  • Court judgments (does not include orders for child support or alimony)

Not all debts can be eliminated in a bankruptcy filing. For example, student loans, child and spousal support, and federal income taxes are all generally not dischargeable. However, if you can get rid of those high credit card bills and medical debts, you may have more income to put towards paying off these nondischargeable obligations and even catching up on secured debts like car loan and mortgage payments.

Who can file for Chapter 7 in New York?

If you live, do business or own property in New York state, you can file a Chapter 7 case here unless an earlier bankruptcy filing was dismissed within the last 180 days or you failed the means test.

The means test compares your household income to the median income for New York households of equal size. The threshold changes on a scheduled basis, but if you make more than the approved limit after all allowable expenses are deducted (e.g., rent, food, clothing), you may be deemed to have enough disposable income to pay down your debts in a Chapter 13 case.

There are exceptions to the means test requirement. If your debts are mainly business-related, the test won’t apply to you. Disabled veterans who incurred debt while on active duty or participating in homeland defense are also exempt as long as their disability rating is at least 30% and over half the debt accumulated during their period of service.

What property can you keep?

A lot of people who could benefit from Chapter 7 debt relief hesitate to file because they fear that they will lose everything. This worry arises from the fact that all nonexempt assets must be surrendered to their bankruptcy trustee to be liquidated (sold) for the benefit of their creditors. 

While this can (and does) happen, most Chapter 7 filers end up keeping most if not all of their personal property by protecting everything with an exemption. In New York, you can choose between state and federal exemption systems. Which one you should select will depend on the type and value of the property you want to protect, but both options can help you keep the assets that matter most, including your home.

Can businesses file Chapter 7 in New York?

Businesses can file a Chapter 7 bankruptcy petition, but the bankruptcy process depends on their structure. Sole proprietors generally file a personal bankruptcy case while the business must do the filing if it’s a partnership, corporation, or LLC. Unlike sole proprietorships, where the business is inseparable from the owner, these entities do not receive a discharge. Instead, they are liquidated, meaning that they cease to exist.

Chapter 13 

Chapter 13 is often called the ‘wage earner’s bankruptcy’ because the petitioner needs to have a regular income. It allows you to restructure your debt and repay it over a three to five-year period. (In a lot of cases, you end up paying a reduced amount for debts like credit cards and medical bills.) Unlike Chapter 7, you are not generally at risk for losing your assets because you are repaying your creditors according to a court-approved plan based on your income and debts.

Advantages of filing Chapter 13 in New York include:

  • You may be able to negotiate lower payments for secured and unsecured debts.
  • You may be able to save your home from foreclosure by repaying all arrears over the three to five-year period.
  • If anyone co-signed any of the debts, your creditors cannot come after them as long as you make regular repayments.

Who can file for Chapter 13 in New York?

Unlike Chapter 7, there is no means test involved with a Chapter 13 filing, but there is a debt limit. As of April 1, 2019, the limit is:

  • $419,275 for unsecured debts like credit cards and medical bills
  • $1,257,850 for secured debts like mortgages and car loans

If you owe more, you will have to file Chapter 7 or Chapter 11, neither of which has a limit on how much debt can be discharged. You also cannot file for Chapter 13 if you previously filed for bankruptcy and that case was dismissed within the last 180 days for reasons like failure to appear in court or abide by the order of the bankruptcy court.

What if you can’t afford the monthly payments?

When you enter into a Chapter 13 plan, you are agreeing to pay a certain amount every month until the case is over. Many people wonder what will happen if they are unable to maintain their repayment plan. What if they lose their job or have their salary or hours reduced, making plan payments impossible?

If the issue is a short-term one, you can explain your situation to the bankruptcy court, which will likely give you more time to catch up and pay off the defaulted amounts. If your financial problems look set to be long-term or permanent (e.g. you have become permanently disabled), your options include:

  • Converting the case to Chapter 7. You will get a new trustee and have to pass the means test.
  • Getting the case dismissed and refiling Chapter 13 when your financial situation improves.  
  • Obtaining a hardship discharge (available under rare circumstances).

Your New York bankruptcy lawyer can recommend the best solution for your case.

Can businesses file Chapter 13 in New York?

Only individuals are eligible for Chapter 13 bankruptcy. If you are a sole proprietor, however, you can file a Chapter 13 case to reorganize both personal and business debts. Business entities such as partnerships, corporations, or LLCs will have to file under Chapter 7 or Chapter 11.

Contact a bankruptcy law firm you can trust

Most New Yorkers who file for Chapter 7 and Chapter 13 report being hesitant at first. Will they lose everything? (No!) Will they ever get credit again? (Yes!) After they file and the automatic stay stops all creditor calls and collection efforts, unfreezes their bank accounts, and stops all wage garnishments, foreclosure or repossession proceedings, and lawsuits, they report feeling a huge sense of relief.

Let Gershburg Law, P.C. help you get there. We have helped many clients put financial setbacks or mistakes behind them by filing bankruptcy in New York. We offer all new clients a free 30-minute consultation, during which we will review your financial situation, provide sound legal advice, and help you identify what type of bankruptcy makes the most sense for you. To learn more or schedule a consultation with a bankruptcy attorney, call 866-554-8082 or contact us online.