Facing money problems can feel overwhelming. When debt piles up, and creditors won’t stop calling, bankruptcy might be the answer you’re looking for. But which type is right for you?
In Idaho, most people file either Chapter 7 or Chapter 13 bankruptcy. These two options work very differently. Chapter 7 wipes out most unsecured debts quickly. Chapter 13 lets you keep your property while you pay back what you owe over time.
The choice between these two depends on your income, what you own, and what kind of debt you have. Some people qualify for Chapter 7 and can get relief in just a few months. Others need Chapter 13 to save their home from foreclosure or catch up on car payments.
This guide will explain both options so you can make the best choice for your situation.
What is Chapter 7 Bankruptcy?
Chapter 7 is sometimes called “liquidation bankruptcy” or “straight bankruptcy.” It’s the most common type of bankruptcy filing in Idaho. The main goal is to discharge your unsecured debts so you can start fresh.
When you file Chapter 7, the court looks at everything you own at that moment. A trustee is appointed to review your case. Any property that isn’t protected by exemptions could be sold to pay your creditors. However, most people who file Chapter 7 in Idaho don’t lose anything because the state’s exemption laws protect basic necessities.
The whole process usually takes three to six months from start to finish. Once complete, debts like credit card bills, medical bills, and personal loans are wiped out. You’re no longer legally required to pay them.
Who Can File Chapter 7 in Idaho?
Not everyone qualifies for Chapter 7. You need to pass something called the means test. This test compares your income to the median income for a household your size in Idaho.
If your income is below the median, you automatically qualify. If it’s above the median, the court looks at your expenses to see if you have enough money left over to repay your debts. When your disposable income is too high, you might need to file Chapter 13 instead.
Idaho’s median income numbers change each year. For 2024, a single person household has a median income around $52,000. A family of four has a median around $89,000. These numbers help determine if Chapter 7 is an option for you.
What Debts Can Be Discharged in Chapter 7?
Chapter 7 eliminates most unsecured debts. These include:
- Credit card balances
- Medical bills
- Personal loans
- Utility bills
- Past due rent (if you’ve already moved out)
- Some older tax debt
However, certain debts cannot be discharged. You’ll still owe:
- Recent income taxes (usually within three years)
- Child support and alimony
- Student loans (except in rare hardship cases)
- Court fines and penalties
- Debts from drunk driving accidents
- Some tax liens
If you have debts that can’t be discharged, you’ll need to keep paying them after your bankruptcy case ends.
What Property Can You Keep in Chapter 7?
Idaho law protects certain property through bankruptcy exemptions. Most people keep everything they own because these exemptions are fairly generous.
You can choose between Idaho state exemptions or federal bankruptcy exemptions. Your lawyer will help you pick the set that protects more of your property.
Common Idaho exemptions include:
- Up to $175,000 in home equity (more for households with elderly or disabled members)
- One vehicle worth up to $10,000
- Household goods and furnishings up to $7,500
- Tools of your trade worth up to $7,500
- Retirement accounts
- Life insurance policies
- Personal injury settlements
If you own property worth more than the exemption amounts, the trustee might sell it to pay your creditors. This rarely happens, but it’s something to discuss with your attorney before filing.
What Happens to Your House and Car?
Many people worry about losing their home or vehicle in Chapter 7. The outcome depends on whether you’re current on your payments and how much equity you have.
For your home, if your equity is less than the exemption amount and you’re current on your mortgage, you can usually keep it. You’ll need to sign a reaffirmation agreement saying you’ll keep making payments. If you’re behind on payments, Chapter 7 won’t help you catch up. The lender can still foreclose unless you get current quickly.
The same goes for your car. If the loan balance is higher than what the car is worth and you’re making payments, you can keep it through a reaffirmation agreement. If you’re behind on car payments, the lender can repossess the vehicle even during bankruptcy.
Chapter 7 provides an automatic stay that stops collection actions when you file. This temporarily stops foreclosure and repossession. But if you can’t catch up on secured debts, Chapter 13 might be a better option.
What is Chapter 13 Bankruptcy?
Chapter 13 works differently from Chapter 7. Instead of wiping out your debts immediately, you create a repayment plan. This plan lasts three to five years, depending on your income.
The court approves your plan based on what you can afford to pay each month. You make one payment to a bankruptcy trustee, who then distributes the money to your creditors according to the plan.
Chapter 13 is often called a “reorganization bankruptcy” or “wage earner’s plan.” It’s designed for people with regular income who want to keep their property while getting their finances back on track.
Who Should Consider Chapter 13?
Chapter 13 makes sense in several situations. You might choose it if you:
- Make too much money to qualify for Chapter 7
- Are behind on your mortgage and want to save your home
- Owe back child support or alimony
- Have tax debt that must be paid
- Own property worth more than exemption limits
- Had a Chapter 7 discharge within the past eight years
- Want to pay off a car loan while keeping the vehicle
Chapter 13 gives you more control over certain debts than Chapter 7. You can catch up on missed payments over time instead of having to come up with all the money at once.
How the Repayment Plan Works
Your repayment plan is the heart of Chapter 13. The plan must pay certain debts in full, while other debts might be paid partially or not at all.
Priority debts get paid first. These include:
- Recent tax debt
- Child support arrears
- Alimony payments
- Trustee fees
Secured debts like your mortgage and car loan are next. If you’re behind on these payments, the plan spreads the arrears over three to five years so you can catch up.
Unsecured debts like credit cards and medical bills are paid last. How much you pay depends on your disposable income. Some people pay nothing toward unsecured debts. Others pay a percentage based on what’s left after paying priority and secured debts.
The length of your plan depends on your income. If you make less than Idaho’s median income, your plan can be three years. If you make more than the median, the plan must last five years.
Benefits of Chapter 13 Over Chapter 7
Chapter 13 offers several advantages for the right situation. You get more time to deal with debts that can’t be discharged. You can keep property that wouldn’t be protected in Chapter 7. And you get powerful tools to deal with secured creditors.
One major benefit is stopping foreclosure. The automatic stay kicks in as soon as you file, stopping the foreclosure process. Your repayment plan then gives you three to five years to catch up on missed mortgage payments while keeping your home.
Chapter 13 also lets you do something called a “cramdown” on car loans. If you bought your vehicle more than 910 days before filing, you might be able to reduce the loan balance to the car’s current value. This can save you thousands of dollars.
For tax debt, Chapter 13 stops interest and penalties from piling up. You pay what you owe over time based on what you can afford, not what the IRS demands. The IRS can’t levy your bank account or garnish your wages while you’re in Chapter 13.
Requirements and Restrictions
Chapter 13 has some limits you need to know about. As of 2024, your unsecured debts can’t exceed $465,275. Your secured debts can’t exceed $1,395,875. If you owe more than these amounts, you can’t file Chapter 13.
You must have filed your tax returns for the past four years before the court will confirm your plan. You also need to complete a credit counseling course from an approved agency before filing.
During your Chapter 13 case, you can’t take on new debt without the trustee’s permission. You can’t sell property or refinance your home without court approval. These restrictions last until you complete your plan or the case is dismissed.
Comparing Chapter 7 and Chapter 13 in Idaho
The biggest difference between these chapters is how they handle your debts and property. Chapter 7 is faster but gives you less flexibility. Chapter 13 takes longer but offers more protection for secured property.
Think of Chapter 7 as a fresh start. Most of your debts disappear in a few months. But you need to qualify based on income, and you might lose property that isn’t exempt.
Chapter 13 is more like a do-over. You keep your property and catch up on what you owe. But you commit to making monthly payments for years. Your financial life is under court supervision until the plan is complete.
Income and the Means Test
Your income determines which chapter you can file. Chapter 7 requires passing the means test. If your income is too high, you’re pushed into Chapter 13.
The means test looks at your average monthly income for the six months before filing. It compares this to Idaho’s median income for your household size. Below the median means you qualify for Chapter 7. Above the median means the court calculates your disposable income.
In Chapter 13, higher income means a longer repayment plan. It also means you might have to pay more to unsecured creditors. The court wants to see that you’re paying as much as you reasonably can toward your debts.
Dealing with Secured Debts
Secured debts are loans backed by collateral like your house or car. How each chapter handles these debts is very different.
In Chapter 7, you have three choices with secured property. You can surrender it and walk away from the debt. You can reaffirm the debt and keep making payments. Or you can redeem the property by paying its current value in one lump sum.
If you’re behind on payments, Chapter 7 gives you limited time to catch up. Most lenders want you current within 30 to 60 days. If you can’t manage that, they can repossess or foreclose even though you filed bankruptcy.
Chapter 13 gives you the entire length of your plan to catch up on arrears. Missed mortgage payments can be spread over three to five years. This makes it much easier to save your home from foreclosure.
For vehicles, Chapter 13 offers the cramdown option. If your car loan is old enough and the vehicle is worth less than you owe, you can reduce the loan to the car’s value. You then pay this reduced amount through your plan, often at a lower interest rate.
Handling Special Debts
Certain debts require special treatment in bankruptcy. These include taxes, student loans, and support obligations.
Tax debt rules are complicated. Some taxes can be discharged in Chapter 7 if they’re old enough and you filed the returns on time. Taxes less than three years old usually can’t be discharged.
In Chapter 13, you must pay non-dischargeable taxes through your plan. But you get three to five years to do it, and you stop paying interest and penalties in most cases. The IRS can’t take aggressive collection action while you’re in Chapter 13.
Student loans almost never go away in bankruptcy. You’d need to prove “undue hardship” in a separate proceeding, which is very difficult. Both Chapter 7 and Chapter 13 treat student loans the same. You’ll still owe them after bankruptcy unless you meet the hardship standard.
Child support and alimony can never be discharged. In Chapter 7, you’ll resume paying them after your case ends. In Chapter 13, you must catch up on any arrears through your repayment plan. This can be helpful because it stops collection actions and gives you time to get current.
Property and Exemptions
What you own affects which chapter works better for your situation. If everything you own is covered by exemptions, Chapter 7 might be the simpler choice. If you have non-exempt property you want to keep, Chapter 13 might be necessary.
In Chapter 7, the trustee can sell non-exempt property to pay creditors. This doesn’t happen often in Idaho because exemptions are generous. But if you own a second home, valuable collections, or business equipment worth more than the exemption, you could lose it.
Chapter 13 lets you keep non-exempt property. You just have to pay unsecured creditors at least as much as they would have received if your non-exempt property was sold in Chapter 7. This is called your “liquidation value.” It becomes the minimum you must pay through your Chapter 13 plan.
For example, say you own a classic car worth $20,000 that isn’t covered by exemptions. In Chapter 7, the trustee would sell it. In Chapter 13, you can keep the car if your plan pays unsecured creditors at least $20,000 over three to five years.
Choosing Chapter 7 or Chapter 13 When You’re Divorced
Divorce creates financial obligations that complicate bankruptcy decisions. Idaho law and federal bankruptcy law both affect how divorce debts are handled.
Support obligations like child support and alimony are treated the same in both chapters. They cannot be discharged. You must keep paying them no matter which bankruptcy you file.
Property settlement debts from your divorce decree are different. These might include your agreement to pay your ex-spouse for their share of equity in the house. Or your obligation to pay off a joint credit card as part of the settlement.
Support vs. Property Settlement Obligations
The bankruptcy code divides divorce obligations into two categories. The first is support, which includes anything “in the nature of” support. The second is property settlement, which covers the division of marital assets and debts.
Support obligations include:
- Regular child support payments
- Alimony or spousal maintenance
- Health insurance premiums for children
- Medical expenses for children
- Educational costs
- Sometimes attorney fees from the divorce
These debts survive both Chapter 7 and Chapter 13. You can’t eliminate them through bankruptcy.
Property settlement obligations include:
- Payments to equalize the division of assets
- Your agreement to pay off joint debts
- Payments for your ex-spouse’s share of property you kept
- Hold harmless agreements for debts in the other person’s name
In Chapter 7, property settlement debts cannot be discharged. You still owe them after bankruptcy. But in Chapter 13, these debts can be discharged. This is a major advantage if you owe significant property settlement amounts.
Why Chapter 13 Might Be Better After Divorce
If you owe your ex-spouse money from property settlement, Chapter 13 can help you in ways Chapter 7 cannot. You can include property settlement debts in your repayment plan as unsecured obligations.
Depending on your income and other debts, you might pay only a portion of what you owe. Whatever isn’t paid through your plan is discharged when you complete it. This can save you thousands of dollars.
Chapter 13 also protects you from collection attempts by your ex-spouse during the three to five years of your plan. They can’t sue you, garnish your wages, or take other collection actions for property settlement debts.
For support obligations, Chapter 13 lets you catch up on arrears through your plan. This stops the state from suspending your driver’s license or taking your tax refunds for back support. You get time to get current while keeping your support obligations separate from your other debts.
Filing Bankruptcy After Closing a Business in Idaho
Many small business owners in Idaho face personal liability for business debts. If you operated as a sole proprietorship or signed personal guarantees for business loans, closing your business might not end your debt problems.
Bankruptcy can help eliminate personal liability for business debts. But the type you choose depends on what kind of business debt you have.
Income Taxes and Payroll Taxes
Business owners often owe taxes when their company struggles. You might have unpaid income taxes from years the business made money but couldn’t pay the IRS. Or you might owe payroll taxes if the business didn’t remit employee withholdings.
Payroll taxes are harder to discharge than income taxes. The IRS considers them “trust fund” taxes because the money belongs to employees, not the business. Personal liability for payroll taxes rarely goes away in bankruptcy.
Income taxes from your business can sometimes be discharged in Chapter 7 if they meet certain conditions. The taxes must be at least three years old. You must have filed the returns at least two years before bankruptcy. And the IRS must have assessed the taxes at least 240 days before you file.
If your business taxes don’t meet these requirements, Chapter 13 might be better. You get three to five years to pay what you owe. Interest and penalties stop accruing in most situations. And the IRS can’t levy your bank account or garnish your wages during your case.
For larger tax debts spanning multiple years, Chapter 13 offers significant advantages. You pay based on what you can afford, not what the IRS demands. If your situation changes during the plan, you can request modifications.
Debts Secured by Business Equipment
Business loans are often secured by equipment, inventory, or receivables. When you close your business, you typically give back this collateral. The remaining balance becomes unsecured debt.
Both Chapter 7 and Chapter 13 can discharge this unsecured debt after the collateral is surrendered. The choice depends on whether you want to keep any of the equipment.
You might want to keep a business vehicle or tools you need for future work. If the collateral is in your personal name and you’re current on payments, Chapter 7 lets you keep it through a reaffirmation agreement.
If you’re behind on payments and can’t catch up quickly, Chapter 13 gives you more time. You can stretch the arrears over your entire repayment plan. In some cases, you might even reduce the loan balance to the equipment’s current value through a cramdown.
General Unsecured Business Debts
Most business debts end up as general unsecured claims in bankruptcy. This category includes:
- Vendor invoices
- Business credit cards
- Lines of credit
- Personal guarantees on business loans
- Lease breakage fees
- Customer refunds and claims
These debts are treated the same as personal unsecured debts. They’re discharged in Chapter 7 without payment. In Chapter 13, they’re paid whatever your plan provides for unsecured creditors, which might be little or nothing.
If your only debts are general unsecured business and personal debts, Chapter 7 is usually the better choice. It’s faster and simpler. You get rid of the debt in a few months and move on.
Chapter 13 makes sense if you have secured debts to deal with or tax obligations that must be paid. It also makes sense if your income is too high for Chapter 7 or you have non-exempt assets you want to protect.
For business owners, there’s a debt limit in Chapter 13 to be aware of. Your total unsecured debts can’t exceed $465,275, and secured debts can’t exceed $1,395,875. If your business debts push you over these limits, Chapter 13 isn’t an option.
Converting from Chapter 7 to Chapter 13
Sometimes circumstances change after you file bankruptcy. What seemed like the right choice at the beginning might not work out. The bankruptcy code lets you convert from Chapter 7 to Chapter 13 if needed.
This doesn’t happen often, but it’s an option that can save your case when situations change.
Voluntary Conversion
You have the right to convert your case from Chapter 7 to Chapter 13 once during your bankruptcy. You might choose to do this for several reasons.
The most common reason is a positive change in your finances. Maybe you got a much better job after filing Chapter 7. Now you can afford a Chapter 13 plan that saves your home from foreclosure.
Another reason is discovering you have non-exempt property you want to keep. If the trustee decides to sell something you own, converting to Chapter 13 lets you keep it by paying its value through your repayment plan.
Some people convert because they realize they have debts better handled in Chapter 13. Property settlement debts from divorce or tax obligations might be easier to deal with in a Chapter 13 plan.
To convert voluntarily, you file a notice with the court. You’ll need to submit the additional paperwork required for Chapter 13, including your proposed repayment plan. The court then decides whether to approve your conversion.
Court-Ordered Conversion
The bankruptcy court can’t force you to convert from Chapter 7 to Chapter 13. But it can dismiss your Chapter 7 case. When that happens, converting to Chapter 13 is usually better than losing bankruptcy protection entirely.
The most common reason for potential dismissal is failing the means test. If you didn’t qualify for Chapter 7 because your income is too high, the court or the trustee can file a motion to dismiss for abuse.
Before the court dismisses your case, you have the option to convert to Chapter 13. This is sometimes called an “induced conversion” because you’re essentially forced to choose between conversion and dismissal.
Other reasons your Chapter 7 case might face dismissal include:
- Not providing required documents to the trustee
- Failing to attend the meeting of creditors
- Not completing the required financial management course
- Hiding assets or giving false information
- Filing in bad faith
In most of these situations, converting to Chapter 13 won’t solve the problem. But if the issue is your income level, Chapter 13 is the appropriate alternative.
What Happens to Your Case When You Convert
When you convert from Chapter 7 to Chapter 13, your case continues under the new chapter. The automatic stay remains in effect, so creditors still can’t pursue collection actions.
Your original filing date determines important things like whether transfers of property can be undone and how long until you can receive another discharge. You don’t get a new filing date by converting.
Any debts that arose before your original filing date are included in the bankruptcy. New debts that came up after you filed Chapter 7 usually aren’t included unless the court says otherwise.
The trustee assigned to your Chapter 7 case steps aside, and a Chapter 13 trustee takes over. You’ll need to submit your proposed repayment plan within 14 days of converting. The court schedules a confirmation hearing to approve your plan.
Converting doesn’t guarantee your Chapter 13 case will be approved. The court still needs to confirm that your plan meets all requirements and that you’re filing in good faith.
Making the Right Choice for Your Situation
Deciding between Chapter 7 and Chapter 13 depends on your specific circumstances. There’s no one-size-fits-all answer. What works for your neighbor might not work for you.
Start by looking at your income. Can you pass the means test for Chapter 7? If not, Chapter 13 is your only option. If you do qualify for Chapter 7, consider whether it actually solves your problems.
Look at your secured debts next. Are you behind on your mortgage or car payments? Do you want to keep your home and vehicle? Chapter 7 won’t give you enough time to catch up on arrears. Chapter 13 might be necessary to protect these assets.
Think about the debts that can’t be discharged. Do you owe significant tax debt? Do you have property settlement obligations from divorce? Chapter 13 gives you better tools for dealing with these debts.
Consider what you own. If you have non-exempt property, the Chapter 7 trustee could sell it. Chapter 13 lets you keep everything as long as you pay your liquidation value through the plan.
Finally, think about your goals. Do you want a fresh start as quickly as possible? Chapter 7 might be the answer. Do you need time and protection to reorganize your finances? Chapter 13 could be the better path.
Many people benefit from filing Chapter 7 first, then converting to Chapter 13 if circumstances change. Others know from the start that Chapter 13 is necessary. Some situations are clear-cut, while others require careful analysis of the pros and cons.
Get Help With Your Bankruptcy Decision
Choosing between Chapter 7 and Chapter 13 isn’t something you should do alone. The wrong choice can cost you your home, your car, or thousands of dollars. An experienced bankruptcy attorney can evaluate your situation and recommend the best option.
The attorneys at Foley Freeman, PLLC, help Idaho residents understand their bankruptcy options. We review your income, debts, and assets to determine which chapter protects you best. We explain the process in plain language so you understand what to expect.
Many people wait too long to get help. They drain retirement accounts trying to pay debts that could be discharged. They lose their homes because they didn’t know Chapter 13 could stop foreclosure. Don’t make these mistakes.
Bankruptcy isn’t something to be ashamed of. It’s a legal tool designed to give honest people a fresh start. Thousands of Idaho residents file bankruptcy every year. Many wish they had done it sooner.
Call Foley Freeman, PLLC, today at 208-888-9111 to discuss your situation. We’ll answer your questions and help you understand your options. The consultation will give you the information you need to make the right decision for your financial future.
Don’t let debt control your life any longer. Find out how bankruptcy can help you move forward.