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WalletPrep worksheet · Debt

How does bankruptcy work? Chapter 7 vs Chapter 13

Name ____________________ Date __________

Key ideas

  1. Chapter 7 erases debt in a few months. A trustee may sell property your state doesn't protect. Most discharges come 60 to 90 days after the creditors meeting.
  2. Chapter 13 is a repayment plan. You pay a trustee monthly for 3 or 5 years, keep your property, and can catch up on a mortgage.
  3. Some debts survive bankruptcy. Child support, alimony, most taxes, criminal fines and most student loans usually stay. Plan for them before you file.

Vocabulary

Chapter 7 bankruptcy
A type of bankruptcy that erases many unsecured debts in a few months, after a trustee sells any property your state doesn't protect.
Chapter 13 bankruptcy
A type of bankruptcy where you repay some or all of your debts through a court-approved plan over 3 to 5 years.
Credit report
A record of your credit accounts, payments, balances and some public records, kept by each of the three credit bureaus.
Automatic stay
The court order that stops most collection actions, lawsuits and foreclosures the moment you file for bankruptcy.
Secured credit card
A credit card backed by a cash deposit you make up front, usually equal to your credit limit. It is a common first card for building credit.

Work it out

Priya lost her job, fell behind on everything and is being sued over a card. Her income is now below her state's median. She has $53,000 of debt, including a $15,000 federal student loan.

  1. Credit cards
  2. Medical bills
  3. Personal loan
  4. Debt a discharge could erase
  5. Student loan that stays
  6. Chapter 7 court fees
  7. Lawyer (assumed)
  8. Cost to file

Check yourself

  1. Kai has $30,000 in credit cards, $4,000 in medical bills and $12,000 in child support arrears. How much could a Chapter 7 discharge usually erase?

    • A. $46,000
    • B. $34,000
    • C. $12,000
    • D. $30,000

  2. What must you do in the 180 days before you file?

    • A. Stop paying your mortgage
    • B. Close all bank accounts
    • C. Take a credit counseling session from an approved agency

  3. Who is Chapter 13 usually a better fit for?

    • A. Someone behind on a mortgage who wants to keep the house
    • B. Someone whose only debt is a small medical bill
    • C. Someone who wants their student loans erased

Your turn

Write down every debt with its balance and who it is owed to, your monthly income and what you own. Then find two bankruptcy lawyers or a legal aid office near you that offer a free consultation and book one.

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Answer key

How does bankruptcy work? Chapter 7 vs Chapter 13

Work it out

  1. Credit cards$22,000
  2. Medical bills$9,000
  3. Personal loan$7,000
  4. Debt a discharge could erase= $38,000
  5. Student loan that stays$15,000
  6. Chapter 7 court fees$335
  7. Lawyer (assumed)$1,500
  8. Cost to file= $1,835
  1. Her unsecured debts are $22,000 + $9,000 + $7,000 = $38,000. A Chapter 7 discharge could erase all of it.
  2. The $15,000 federal student loan is not discharged. She can apply for an income-driven repayment plan instead.
  3. Court fees of $335 plus an assumed $1,500 lawyer fee (prices vary) come to $1,835, far less than one year of minimum payments.

Check yourself

  1. B. $34,000 $30,000 + $4,000 = $34,000 of cards and medical bills can usually be discharged. Child support survives bankruptcy.
  2. C. Take a credit counseling session from an approved agency Credit counseling from an approved agency within 180 days before filing is required for almost everyone.
  3. A. Someone behind on a mortgage who wants to keep the house Chapter 13 lets you catch up on missed mortgage payments over the plan while you keep making regular ones.