Which Chapter in Bankruptcy is Right For Me?

Chapter 7 vs Chapter 13

I will endeavor to be brief.

The moment that you file your case, whether in chapter 7 or chapter 13, a temporary restraining order is issued by the bankruptcy court prohibiting collections of any type with a few exceptions. Exceptions include things like child and spousal support and certain types of government debts.

A chapter 7 bankruptcy, also called a straight bankruptcy, and also called a liquidation bankruptcy is the one that most people are thinking of and talking about when they discuss bankruptcy. Over in about 4 months, this is it’s primary advantage, you’re in and you’re out again.

In a chapter 7, you’re allowed to keep only so much property. Whatever you own over and above what you get to keep, the bankruptcy trustee takes away from you, liquidates or sells it, and uses the proceeds to pay your creditors a pro rata or proportional share of the funds based on the percentages of the total debt that’s owing from you to your creditors. Suffice it so say that if you owe $100,000 and the Trustee is able to collect $25,000 from your property, then your creditors will get about 25% of the debts that you owe them.

Most of you will keep everything you own and your creditors will get nothing.

Any portion of the debt left over after the trustee administers your case, whether it’s 95% of the balance or 100% of the balance that’s unpaid, that portion is discharged by the bankruptcy.

So in a small nutshell a Chapter 7 is a bankruptcy where the bankruptcy trustee may take property away from you (if there’s any to take) and when it’s over, your consumer debts are discharged or in other words, you receive a court order, called a discharge order, which is a permanent injunction prohibiting collections.

Remember that there are exceptions to the discharge. Certain kinds of debts are exempt from the discharge and will remain a personal obligation for you to have to pay once your case is over. Child Support, Spousal Support, Student Loans, Recent Income Taxes, and a number of things which are similar in nature are not discharged. You will still have to pay your mortgage if you want to keep your house, you will have to pay for your car if you want to keep your car as well. For more details (but only if you’re in California) and to discuss specific debts, call me 858 452 4500.

You must qualify for a chapter 7 by showing that your income is sufficiently low or that certain expenses are sufficiently high or both. This test is called the Means Test.

With Chapter 13 you get to keep everything. If you would have lost it in the chapter 7, you can still keep it in the chapter 13 as long as you pay the bankruptcy trustee for it instead of giving it to him and letting him sell it. A chapter 13 case is a bankruptcy with a payment plan. Payment plans last from 3 to 5 years.

The payment is determined by your income and expenses. If you don’t qualify for a chapter 7, then your payment is determined by what the means test states you have to pay.

There are other reasons you might file a chapter 13 instead of a chapter 7, in a chapter 13, you are able to propose a payment plan that allows you to catch up unpaid payments on your home and thus at the end of the payment plan, you are current on your first mortgage again. If you have a 2nd mortgage and your home’s value is lower than the balance on the first mortgage, then you may qualify to have the 2nd mortgage removed from your home.

If your vehicle is more than 910 past the purchase date, you can cram down or reduce the balance on the car to the car’s value. Arguably, that might not be much of a reduction after 910 days have gone by but I have seen it be as much as $5000 in principal and a reduction in the interest rate of about 5%.

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