Bankruptcies - Chapter 7 or Chapter 13?
When considering Bankruptcies, what is the difference and what is best for your situation?
When struggling with crushing debt and feel like there is no way out, bankruptcy often comes to mind as an option. There are so many different ideas of what bankruptcy is, what happens when you file, and what will happen to your assets and debts. This is especially true if you own a home. This blog will explain the differnece between a Chapter 7 and a Chapter 13 Bankruptcy and address some important considerations when you are thinking about your options.
Chapter 7 Bankruptcies
Chapter 7 Bankruptcies are considered "liquidation" bankruptcies. These are the type that generally come to mind when one initially thinks about bankruptcy. In these cases, when a debtor files for bankruptcy, their debts are discharged after liquidating their non-exempt assests. Most of the time, Chapter 7 banktupties end up being "no-asset" bankruptcies which means there are no assets to liquidate. Usually the debtor's property is protected under the state exemption laws, which currently allows for up to $12,100.00 of personal property to be exempted and up to $22,750.00 of a debtor's equity in their primary residence exempted. These amounts are for unmarried debtors. If married couples file a joint bankruptcy, these amounts are per debtor so the total exemption amounts are doubled. In addition, to personal property and home equity, interests in retirement accounts are generally exempt.
The point is that often times, most assets that debtors own are exempt property and they do not lose any assets. However, this is not always the case. If you do have significant equity in your home and you file a Chapter 7 bankruptcy, the trustee can force the sale of your home to pay your creditors. This is a serious consideration because once you file a Chapter 7 bankruptcy and the trustee begins to look to sell your home, you cannot just decide to dismiss your case. However, when you have significant value in your home, Chapter 13 may be the answer
Chapter 13 Bankruptcies
Chapter 13 Bankruptcies different than Chapter 7 bankrupties. These are considered "wage earners" bankruptcy. Instead of having your debts discharge quickly (as in Chapter 7), and having your assets, if any, liquidated to pay your debts, in these cases you are paying the bankruptcy trustee a monthly payment to pay your debts. Most plans are between three (3) and five (5) years.
There are a two primary reasons debtors will file a Chapter 13 instead of a Chapter 7. One of these reasons is that the debtor does not qualify under the means test. The means test looks at the debtor's income for the six (6) months prior to the month of filing to determine their annualized income. If their income is above the median income for their state and household size, they generally do not qualify for a Chapter 7. There are some exceptions to this which can be discussed during a consultation with a bankruptcy attorney.
If the debtor is over the median income, the debtor will need to make a five (5) year plan for payments to the trustee.The amount the debtor has to pay each month is based on numerous factors including, but not limited to: their disposable income and their non-exempt property. However, after the debtor makes their monthly payments to the trustee for five (5) years, any remaining unsecured debt that has not been paid may be discharged. This could mean that all debt has been paid in full, or it could be that the unsecured creditors have not received any payments. It depends on the specifics of each individual case.
The second primary reason debtor's will choose to file a Chapter 13 bankruptcy rather than a Chapter 7, is that they have significant assets that they do not want to have liquidated. Most often this is the result of having too much equity in their home. In these cases, the debtor will create a plan to pay their debts over 3-5 years. If the debtor qualifies for a Chapter 7 by income, their plan may be as short as three (3) years. However, if they need more time to pay off their debt, these plans can last up to five (5) years. Because they have decided to file a Chapter 13 in order to protect their assets, they must pay their unsecured creditors at least the amount of they would have received if the debtor had filed a Chapter 7. For example, if the debtor has $30,000 worth of non-exempt property, they must pay at least $30,000 of their unsecured debt in order to protect their non-exempt property. Just like at the end of their plan, any unsecured debt that remains may be discharged.
In Closing
This blog is meant to give those looking for more information on bankruptcies a short explanation of the differences between Chapter 7 and Chapter 13 Bankrupties. In addition to the factors discussed above there are other factors to consider when deciding between these option as well as deciding if Bankruptcy is right for you. This does not replace seeking legal advice from an experienced Bankruptcy Attorney who can discuss your specific situation and address the other factors that may affect your options. Our office offers free consultations for those considering bankruptcy or need more information about it.
If you would like to know more about bankruptcy and how it applies to your situation, please call our office or submit a form on our site to schedule a free consultation today.