Topics on this page:

• Introduction
• Chapter 7 vs. Chapter 13
• When Chapter 7 Might Be Better Than Chapter 13?
• When Chapter 13 Might Be Better Than Chapter 7?
• Secured Debts in Bankruptcy
• What if I have filed for bankruptcy before?
• Should I File an Individual or Joint Bankruptcy?

Introduction

People considering filing an individual bankruptcy most often file either Chapter 7 bankruptcy (Liquidation) or Chapter 13 bankruptcy (Wage-earners or Reorganization). The type of bankruptcy you should file will depend on your unique financial situation, and what you are trying to accomplish with your bankruptcy.  

Your income and assets will determine the bankruptcy chapter you file. Before you can file for bankruptcy, you will have to take the Means Test.  A Means Test measures your household income against state averages.  If your income level falls below a certain threshold, you will be eligible to file for Chapter 7.  If your income level is above the threshold, you will need to file under Chapter 13. For more information about Means Testing, see the U.S. Department of Justice’s website.

Individuals who qualify for Chapter 7 may be eligible for Chapter 13, provided their disposable income is sufficient to cover a repayment plan with creditors. Depending on what you are trying to accomplish with your bankruptcy, Chapter 13 might be a better option, even if you are eligible for Chapter 7. For example, if you have property you would lose in Chapter 7, that you would like to keep, you can protect it in Chapter 13.

Chapter 7 vs. Chapter 13 

Basics

• Chapter 7
  • In Chapter 7 a trustee will sell nonexempt property to repay your creditors. A Chapter 7 bankruptcy will discharge most types of unsecured debt.
• Chapter 13
  • In Chapter 13 bankruptcy, you repay your creditors (some in full, some in part) through a repayment plan.

Eligibility

• Chapter 7
  • Chapter 7 is available to those whose income is less than their state's median or who can pass the means test. Some high-income earners won't be eligible for Chapter 7.
• Chapter 13
  • Chapter 13 has no income requirement, but unsecured debt must be below $465,275 and secured debt below $1,395,875 (for cases filed between April 1, 2022, and March 31, 2025).

Time Frame

• Chapter 7
  • A typical Chapter 7 bankruptcy case takes 3 - 4 months to complete.
• Chapter 13
  • The Chapter 13 payment plan lasts 3 or 5 years (depending on your income).

Property

• Chapter 7
  • Many Chapter 7 debtors keep all or most of their property using bankruptcy exemptions. Petitioners with significant nonexempt equity or assets could lose them to satisfy some debts.
• Chapter 13
  • Property is not sold in a Chapter 13 bankruptcy. You pay the value of nonexempt property or assets you cannot protect with a bankruptcy exemption through the repayment plan.

Homeowners and Foreclosures

• Chapter 7
  • Chapter 7 can temporarily stop foreclosure, but the foreclosure will eventually continue unless you can get current on your mortgage.
• Chapter 13
  • Chapter 13 can stop a foreclosure, and you can make up past due mortgage payments through the repayment plan and keep the property.

Read the law: U.S. Code, Title 11, Chapter 7
Read the law: U.S. Code, Title 11, Chapter 13

When Chapter 7 Might Be Better Than Chapter 13?

Here are a few scenarios where Chapter 7 bankruptcy might be best:

You are unemployed and have few assets 

If you are unemployed and have few assets, a Chapter 7 bankruptcy is the fastest, easiest, and most effective means of getting rid of debt. This common bankruptcy case is often called a "no asset" bankruptcy.

You need immediate relief from your debts

Chapter 7 bankruptcy generally take only 4 - 6 months to complete, whereas Chapter 13 bankruptcy moves much more slowly, with repayment plans taking 3 - 5 years.  

You want to eliminate the bulk of your debts

Under Chapter 7, you eliminate most of your debts, but you also stand to lose more of your assets.  Under Chapter 13, the repayment requirements are higher, but you may be able to keep more of your property.

You are an unemployed homeowner with significant equity 

If you own a home and have a significant amount of equity in the property, Chapter 7 may be an option. When filing Chapter 7 bankruptcy you can protect a portion of the equity you have accumulated in their home through the Maryland Homestead exemption. If the amount of equity you have exceeds the current exemption, the courts may require you to refinance the property and pay some of the accumulated equity to creditors. 

Read the law: Md. Code, Courts and Judicial Proceedings, § 11-504; U.S. Code Title 11 § 522; U.S. Code Title 11 § 104 

When Chapter 13 Might Be Better Than Chapter 7?

Here are a few scenarios where Chapter 13 bankruptcy might be best:

You need to protect others 

If you file under Chapter 7, any codebtors you might have on a debt will still be liable for paying up, even if you are not.  If you file under Chapter 13, your codebtors will be protected from creditors.

You want to keep your assets

You probably do not want to give up your possessions if you can avoid it.  Chapter 13 requires more repayment efforts than Chapter 7 but you will get to keep more of your assets.  Under Chapter 7, the price you pay for a discharge of your debt is liquidation of your assets.

You need to catch-up on missed payments

Chapter 13 will allow you to retroactively catch up on missed payments toward your car, or even the mortgage on your home. Chapter 7 does not allow you to make up payments that have already been missed.

You want to pay your creditors back but need to relieve the pressure now 

A Chapter 13 bankruptcy repayment plan will allow you to spread your debt payments over a 3-5 year period. 

You are an employed homeowners facing mortgage delinquency or foreclosure

Chapter 13 bankruptcy allows homeowners who have fallen behind on mortgage payments to catch up or "cure" past due mortgage payments. You may be able to save your home from foreclosure and get rid of many debts, such as credit card balances, medical bills, and sometimes second and third mortgages.  Chapter 7 bankruptcy does not offer homeowners a way to make up mortgage arrears, so it is not a good choice for delinquent homeowners who want to keep a home.

Secured Debts in Bankruptcy

If you have "secured" debts, the best choice for filing bankruptcy will depend on whether you are current in your payments on the secured debt. A secured debt is one where the creditor has taken a lien on the property as collateral. Practically, this means that the creditor has the right to recover their share of the property if you stop making payments. The most common examples are a house or a car.

• "Secured" debts cannot be discharged under Chapter 7.
• Past due payments on a "secured" debt can be paid under a Chapter 13 plan.

What this means for you will depend on your payment status on that debt - that is the house or car. If you are behind in your payments and want to keep the asset, file for Chapter 13. Otherwise, you will lose the asset.

If you are current in your payments and you want to keep your house while you file for bankruptcy, the outcome will depend on:

• how much debt you have;
• the amount of equity you have in the house; and,
• the type of bankruptcy.
  • Under Chapter 13, you will not lose your house if you can keep up the payments laid out in the reorganization plan.
  • Under Chapter 7, look to see if the total debt on the house is less than the market value of the house. If you have equity in the house after you subtract the debt, look to see if the equity difference is less than the amount you are allowed under the exemptions. If this equity difference is covered by the exemptions, you will be able to keep the house. If the equity difference is more than the exemptions, you are likely to lose the house.

What if I have filed for bankruptcy before?

The type of bankruptcy you had before will determine when (and if) you can file again. You cannot file under Chapter 7 if you received a Chapter 7 or Chapter 13 discharge within the past 8 years. You can file under Chapter 13 in any of the following circumstances:

• You completed a previous Chapter 13 plan and you paid at least 70% of the unsecured debt, 
• 180 days have passed since your past bankruptcy case (Chapter 7 or 13) was dismissed.  (You can refile sooner if your case was dismissed "without prejudice.")
• You can file under Chapter 13 at any time if the plan proposes that you will repay 100% of your debt.

However, after receiving a discharge under Chapter 7, you must wait at least 4 years before you can file for a Chapter 13 Bankruptcy. You can also file under Chapter 7 if you completed a Chapter 13 plan and you paid at least 70% of the unsecured debt.

Read the law: U.S. Code, Title 11 § 727

Should I File an Individual or Joint Bankruptcy?

If you are married, you can choose to file for bankruptcy jointly with your spouse or individually. In general, filing for bankruptcy together makes sense if you have a lot of joint debts as Maryland law allows spouses filing together to double the exemption amount if they both own the property. Maryland law does not allow married couples to double their Maryland Homestead exemption in a joint case.

However, individual bankruptcy might be in your best interest if:

• only one spouse has debt; or,
• one spouse has nonexempt separate property that may be at risk in bankruptcy.