What Is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?
Filing for bankruptcy is an important decision that can help you avoid your creditors’ collection activities and regain control over your finances. However, it is a serious and complex process, and you should understand your options if you believe that bankruptcy could provide the relief you need. Two of the most common filing statuses sought by individual filing parties in US bankruptcy courts are Chapter 7 and Chapter 13. Both chapters can provide financial relief and protection from creditors, but they function very differently, include different requirements, and offer different types of debt relief for those who qualify.
If you need specific advice about your financial situation, it is best to contact an attorney as soon as possible about your concerns. An experienced bankruptcy lawyer is one of the best assets you can have on your side if you need to file for bankruptcy. Before you begin the filing process, you might wonder, what is the difference between Chapter 13 and Chapter 7?
Which Is Better?
Chapter 7 and Chapter 13 are very different types of bankruptcy. The critical difference is that Chapter 7 revolves around the liquidation of assets to repay debts. In contrast, Chapter 13 is a debt restructuring option that can make it easier to manage your outstanding debts. Chapter 7 bankruptcy is available to both businesses and individuals, while Chapter 13 is only available to individuals.
Both forms of bankruptcy have specific eligibility requirements, and your attorney can advise you about which option is more suitable. Chapter 7 and Chapter 13 bankruptcy also involve very different timelines. Chapter 7 tends to provide a discharge much sooner than Chapter 13, but it is a more challenging process that will include liquidating most of your assets. Some people may qualify for both Chapter 7 and Chapter 13 bankruptcy, but it is essential to make an informed decision before you file.
Understanding Chapter 7
Chapter 7 bankruptcy revolves around liquidation. This means that if you cannot repay your debts, Chapter 7 would allow you to sell off your assets and property to repay your creditors. This option is available to individuals and businesses, but to qualify, they must meet the Chapter 7 Means Test to determine their monthly disposable income. If their disposable income is low enough, they are eligible for Chapter 7 and can proceed with their case.
Your attorney can help you gather all the financial documentation you will need to start Chapter 7 proceedings. The case will involve placing all of your non-exempt property into a trust in the care of a designated trustee. The trustee has the authority to sell all of this non-exempt property to repay your creditors. While Chapter 7 doesn’t give you a way to discharge late mortgage payments to avoid foreclosure or repossession, it is much faster than Chapter 13. Generally, it gives the opportunity for a fresh start within a few months of filing.
Once the bankruptcy court has assessed the filing party’s situation and determined how much of their non-exempt property they must liquidate, the trustee manages the sell-off. Then the bankruptcy court discharges the remaining debt. This effectively allows the filing party to repay their debt for much less than they owe. The tradeoff is that Chapter 7 requires liquidating a great deal of property.
Essential Information About Chapter 13
Chapter 13 does not provide debt relief as quickly as Chapter 7 can, but it does allow the filing party to retain ownership over most of their property and assets. Chapter 13 bankruptcy revolves around restructuring the filing party’s debts into a manageable repayment plan, and this filing option is only available to individuals, not businesses.
If you believe that Chapter 13 is more suitable for you, you must ensure that you can file for Chapter 13 before starting the process. As of 2020, any unsecured debts an individual has must be less than $394,725, and they must have no more than $1,184,200 in secured debts to be eligible for Chapter 13.
You and your attorney must fill out a financial disclosure package that includes complete and accurate records of all your assets, debts, and property in order to start Chapter 13 proceedings. You will be allowed to keep your property as long as the bankruptcy court approves your proposed debt repayment plan. An experienced Chapter 13 bankruptcy attorney is your best resource if you need help developing your plan. Once you complete all of your repayments under the terms of an approved plan, your debts are discharged.
Chapter 13 can allow you to lower the principal owed on secured debts if you qualify, and you may also be eligible to have unsecured junior liens from your real property stripped. During your repayment term, you must remit your scheduled repayments to your designated trustee on time, and you can retain ownership over most of your assets and property. The drawback to Chapter 13 bankruptcy is that you will need to continue making payments every month until you complete your repayment term. This will mean parting with the majority of your disposable income every month.
Which Type of Bankruptcy Is Best for Me?
If you wonder whether Chapter 7 or Chapter 13 would be more suitable for you, it’s first vital to determine whether you are eligible for both options. Depending on your circumstances and the amount of debt you owe, you may not have a choice as to what type of bankruptcy filing option is available to you. This is another reason it is important to work with an experienced bankruptcy attorney if you intend to pursue any bankruptcy status. Your attorney can review your debts and help you determine whether you have options for your bankruptcy filing.
Typically, Chapter 7 bankruptcy is better for low-income debtors. In contrast, Chapter 13 bankruptcy is more suited to those who simply need some extra time and flexibility to catch up on missed payments. Ultimately, it is always best to consult an attorney to determine which bankruptcy filing option is best for you.
Should I Hire an Attorney for Chapter 7 or Chapter 13 Bankruptcy?
Technically, you do not need to hire an attorney to file for bankruptcy. However, hiring legal counsel to assist you with the process will make it much easier. It will increase your chances of securing the best type of bankruptcy status for you.
Filing for bankruptcy requires gathering extensive financial documentation and compiling a complete financial disclosure for the bankruptcy court’s consideration. It is much easier to handle this process when you have an experienced attorney assisting you. Your bankruptcy attorney will help you prepare for your bankruptcy court proceedings, from your initial petition to all the hearings you will need to attend throughout your case proceedings.
What to Expect in Your Bankruptcy Filing
Bankruptcy filing is a complex process, and any errors made during the initial phase of your bankruptcy case can significantly increase the time required for the bankruptcy case to unfold. An experienced attorney will be invaluable as you begin the bankruptcy filing process. They will help you gather the documentation you will need to provide to the bankruptcy court and prepare you for each stage of your case.
The first phase of filing for bankruptcy is the initial petition. Once you file for bankruptcy, an automatic stay is placed on your assets and property that will prevent creditors from continuing with their collection efforts. This alone can be a major relief, especially if you have dealt with repeated calls and other collection efforts for months. However, the initial filing is only the first step in securing bankruptcy status.
Next will be a preliminary hearing where a bankruptcy court judge will consider your proposed repayment plan if you are filing under Chapter 13. Your bankruptcy attorney can help you draft a repayment plan proposal that suits your needs and offers reasonable repayment terms to your creditors. The judge then coordinates a confirmation hearing with you and your creditors. During this hearing, your creditors will have the opportunity to raise their concerns or objections over your proposed repayment plan. If you are filing under Chapter 7, the case moves to placing your non-exempt assets into a trust. The designated trustee will begin liquidating those assets to repay your creditors. The Chapter 7 liquidation process typically only takes a few months, while a repayment plan under Chapter 13 typically has a three to five-year repayment term.
Dischargeable vs. Non-dischargeable Debts
Whether you are filing for Chapter 7 or Chapter 13 bankruptcy, an understanding of the differences between dischargeable and non-dischargeable debts is vital. Dischargeable debts are debts that are eligible for complete discharge even without full repayment. Most consumer debts will fall under this category, such as unpaid medical bills, credit card debts, and private financing debts. Non-dischargeable debts are debts that do not qualify for forgiveness, and you will need to repay them somehow. Non-dischargeable debts include:
- Student loans
- Unpaid child support
- Unpaid spousal support
- Most forms of back taxes
- Debts from tax-advantaged retirement plans
- Personal injury claim restitution from drunk driving accidents
- Fines and penalties you owe to government agencies
- Debts from condominiums and cooperative housing agreements
- Unpaid legal fees from child custody and child support determination case
- Court-assessed financial penalties, including restitution and penalty assessments
- Any debts you neglected to include in your bankruptcy petition. The only exception would be if a creditor were aware of your bankruptcy filing.
In Chapter 7 bankruptcy proceedings, the trustee designated to handle your case can liquidate your assets to pay off non-dischargeable debts first, resulting in you ultimately paying much less than you owe on your remaining dischargeable debts. If you restructure your debts under Chapter 13 bankruptcy, your repayment plan will prioritize non-dischargeable debts.
It is also possible for creditors to argue that the debts you owe them are non-dischargeable, but this is only applicable to certain situations. For example, if you ran up your credit card on luxury item purchases valued over $650 in the 90 days before your filing for bankruptcy, the credit card company representative may argue that the debt is nondischargeable. Other debts may also qualify as non-dischargeable if they were obtained under fraudulent pretenses or if they involved malicious injuries to another party or willful destruction of property.
Can My Debt Discharge Be Denied?
Under certain circumstances, the bankruptcy court judge may deny the discharge of your debts. However, this typically only happens if you fail to uphold the terms of your bankruptcy resolution. For example, suppose you lied under oath during your bankruptcy proceedings, failed to provide an accurate accounting of all your assets, attempted to hide assets, or otherwise defraud the bankruptcy filing process. In that case, the court will likely deny the discharge of your debts even if they would otherwise qualify as dischargeable.
It is also possible for your discharge to be denied if you file for bankruptcy too frequently. For example, you cannot receive a discharge under Chapter 7 if it is within eight years of you filing a previous Chapter 7 case. If you are filing under Chapter 13, the bankruptcy court will not allow you to obtain a second discharge within two years from the filing date of your first Chapter 13 case. These time limits adjust if a debtor files under Chapter 7 and Chapter 13, depending on which type of filing status they attempt first. If you first filed for Chapter 13, you would need to wait at least six years before you can file under Chapter 7. If you first filed for Chapter 7, you need to wait at least four years before you can file under Chapter 13.
What Property Is Exempt From Chapter 7 Liquidation?
If you file for bankruptcy under Chapter 7, you should understand that obtaining a discharge will require you to liquidate all your non-exempt property. Typically, a Chapter 7 filer may keep:
- Their home. Most states uphold a homestead exemption that allows you to retain ownership over your home’s equity up to a certain amount. If you don’t have any home equity or qualify for the homestead exemption, you may keep your home.
- Their tools required for their job. Most bankruptcy courts will allow the debtor to keep the tools they need for a trade, such as construction equipment, power tools, and art supplies.
- Their vehicle. You will be allowed to keep your vehicle as long as it is only worth a few thousand dollars. If you own multiple vehicles, you will probably need to sell all but one of them.
- Modest household items. You will be allowed to keep your furniture and basic household items, with the only common exception being jewelry. The bankruptcy court will likely only allow you to keep up to $1,000 worth of jewelry under Chapter 7.
- The cash value of held insurance policies.
- Retirement account funds. If your retirement account qualifies for ERISA protection, you will not need to liquidate it. However, this protection only extends to a certain amount for some assets. For example, IRA account holdings are only protected up to $1,362,800 per person. This limit will adjust again in 2022 to account for cost-of-living increases.
- Public benefits. You will be allowed to keep your Social Security benefits, any stimulus payments received from the government, welfare, and other similar public benefits.
If you have any other assets or property that does not fall under these designations, but you wish to protect them from liquidation, you may be able to secure a private property exception under certain circumstances.
Why Should I File for Bankruptcy?
Many Americans carry negative interpretations of bankruptcy as it essentially equates to insolvency. However, bankruptcy is a valuable process that can provide financial relief and a fresh start with your finances. If you have been repeatedly contacted by creditors and cannot repay your debts because of your basic living expenses, bankruptcy may be your best option for putting a stop to your creditors’ collection activities against you.
Chapter 7 bankruptcy may not seem too appealing at first because it will require you to sell all your non-exempt property, but it can provide relief much faster than Chapter 13. On the other hand, Chapter 13 can provide the extra bit of breathing room you may need to catch up on your late payments and avoid foreclosure and repossession actions.
Deciding to file for bankruptcy may be one of the most important financial decisions you ever make. It’s essential to be informed about the process and seek professional guidance from an experienced bankruptcy attorney before you begin. While you may not technically need an attorney to file for bankruptcy, the right attorney will ensure you file under the most appropriate chapter for you and guide you through your bankruptcy proceedings. If you are unsure whether you should file for bankruptcy or need debt relief and don’t know which bankruptcy chapter is right for you, contact the Law Office of Christopher P. Walker and schedule a consultation with a reliable bankruptcy attorney.