Should You File for Personal Bankruptcy Under Chapter 7 or 13?
Individuals or couples who are experiencing financial difficulties and are considering filing for bankruptcy often face the choice of whether they should choose to file under Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code. Both forms of personal bankruptcy help protect you from creditors’ collection efforts, but the one that is right for you depends on your personal financial situation.
As a general rule, when an individual (known as the “debtor”) does not have the assets or income to work out a payment plan with creditors filed for Chapter 7 bankruptcy and, in return for handing over most of their assets to creditors, have their unsecured debts discharged by the Bankruptcy Court. When the debtors have a regular income and are seeking to restructure their debts while retaining most of their assets, they will usually file for Chapter 13 bankruptcy protection.
If you file for either Chapter 7 or Chapter 13 bankruptcy, you will automatically benefit from the automatic stay that stops the majority of collection actions by your creditors, including court proceedings. This stay remains in place until the Bankruptcy Court has discharged your case. But in some cases, the judge will allow creditors to repossess property that the debtor has offered as collateral.
In the following sections we will provide greater detail on both types of personal bankruptcy and explain the benefits and limitations of each.
What is Chapter 7 Bankruptcy?
Chapter 7 was added to the Bankruptcy Code to give individuals and couples a quick and efficient way to eliminate most of their unsecured debt. Unsecured debts are usually loans for which the borrower has not provided any collateral. The most common kind of unsecured debt in the U.S. today is credit card debt because the card issuer has no right to seize your property if you fail to repay it.
If you take advantage of Chapter 7 bankruptcy to rid yourself of your unsecured debts you will need to give up much of the property that is not exempt from the bankruptcy process. This becomes what is known as the bankruptcy estate, which is formed when you file for Chapter 7 bankruptcy. The bankruptcy estate is the temporary legal owner of your non-exempt property, including property that you own and is in someone else’s possession. A trustee will be assigned to the estate by the Bankruptcy Court to administer the estate and convert as many of its assets as possible into cash that can be distributed to your creditors based on creditor priority.
If you file for bankruptcy under Chapter 7 you will be allowed to keep a certain amount of property that is exempted from the bankruptcy estate. The bankruptcy trustee cannot sell those assets to pay your creditors. The amount of exempt property you may keep varies by state. California has two exemption systems: one that provides greater benefits to debtors with substantial home equity and a second that works better if you do not have much home equity but have other assets you would like to protect.
Who Can File for Chapter 7 Bankruptcy?
Not everyone who is having financial difficulties qualifies for Chapter 7 bankruptcy. To qualify, you must meet the following requirements:
- Earn a monthly income over the previous six months that is less than the median income for similar households in your state. You may also qualify by passing a means test that takes into account your family size, income, and expenses. Here an experienced Bankruptcy Lawyer can assist you with the “means test”.
- Attend a credit counseling program that has been approved by the Department of Justice’s U.S. Trustee Program. This can be done online or over the internet.
- Have not filed a Chapter 7 bankruptcy petition in last eight years.
- Have not filed for Chapter 13 bankruptcy within the previous six years.
Even if you qualify to file for Chapter 7 bankruptcy, your case can still be dismissed if the Bankruptcy Court finds that you filed for bankruptcy in an effort to defraud creditors.
If a couple is married, they may choose to file a joint Chapter 7 petition or file individual petitions. However, even when the couple files a joint petition, both individuals will be subject to the same document filing requirements that would have applied had they filed individually.
What Debts are Discharged Under Chapter 7?
Should you choose to file a Chapter 7 bankruptcy petition, the Bankruptcy Court will usually discharge most of your unsecured debt, including your credit card debt and unpaid medical bills. The court will sometimes discharge secured debts, like a home mortgage or a lien, but the creditor will retain the right to repossess the property. Additionally, a creditor may file an objection to the discharge of certain types of debts.
Not all unsecured debt can be discharged by filing for Chapter 7 bankruptcy. The following types of unsecured debts are rarely discharged:
- Child Support
- Student Loans
- Some types of tax debt
- Court fees and penalties
- Personal injury debts resulting from an accident caused by the debtor’s intoxication
- Court fees and penalties
What is Chapter 13 Bankruptcy?
If you are earning a regular income, Chapter 13 bankruptcy will allow you to implement a plan to repay your debts without forfeiting many of your assets. This is done through a Chapter 13 plan that is approved by the Bankruptcy Court. Your plan will propose to repay your creditors using your disposable income over three to five years for the court’s approval. When the approved plan is completed, all of your unsecured debts will be discharged.
Chapter 13 bankruptcy offers you a number of advantages over Chapter 7 when it comes to personal bankruptcy. Perhaps the most significant is that filing for Chapter 13 bankruptcy will often allow you to save your home from foreclosure by enabling you to stop foreclosure proceedings, cure delinquent mortgage payments, and reduce your monthly payments. However, a Chapter 13 filing will not keep you from losing your home if you fail to keep current on your mortgage payments, even if they have been reduced under the repayment plan.
Who Can File for Chapter 13 Bankruptcy?
Either an individual or a married couple can file for Chapter 13 bankruptcy if their unsecured debts do not exceed $419,175 and whose secured debts do not exceed $1,257,850. If you have debts in excess of these amounts or have extremely complex debts, you may be better off filing for bankruptcy under Chapter 11.
What is a Chapter 13 Plan?
Within 15 days of filing your Chapter 13 bankruptcy petition you must file a plan with the Bankruptcy Court that lays out how you plan on repaying your creditors over the next three to five years. The plan must provide for you to make fixed regular payments to the bankruptcy trustee who was appointed to manage the bankruptcy estate when you filed your Chapter 13 petition.
Your chapter 13 plan should group the claims of your creditors into the following categories:
- Priority claims which include most of your unpaid tax obligations and the costs of your bankruptcy proceeding;
- Secured claims that give your creditors the right to recover collateral should you fail to repay them; and
- Unsecured claims that receive no preferential treatment in bankruptcy.
Your Chapter 13 plan must provide for the full payment of your creditors’ priority claims unless your creditors agree otherwise. The plan may also reduce or extend payments on your secured debts. Finally, there is no requirement that the plan repays your unsecured debts in full, so long as you pay over all of your disposable income to the trustee for distribution to your creditors while the plan is in place and it provides that your unsecured creditors will receive at least as much as they would have if you had declared bankruptcy under Chapter 7.
If the judge approves your plan, the trustee will distribute your payments to your creditors under the terms laid out in it. You must start making payments under the plan within 30 days of filing it, even if the judge has yet to approve the plan.
One of the trustee’s responsibilities in a Chapter 13 bankruptcy is to organize a meeting of the creditors that you must attend to answer questions regarding your financial situation and your proposed repayment plan. The judge will then conduct a confirmation hearing to see if your plan is feasible and meets the necessary standards. Creditors can attend the hearing to ask questions or file objections to the plan. But if the judge confirms the plan your creditors will be barred from taking any collection actions not provided for in your plan.
After fulfilling your repayment obligations under the plan, the Bankruptcy Court will discharge you from paying any debts provided for in your bankruptcy plan or disallowed by the judge.
Additional Questions About Chapter 7 vs. Chapter 13 Bankruptcy?
If you live in the Southern California and are considering filing for personal bankruptcy, the experienced bankruptcy attorneys at Raxter Law can help you determine whether you should be filing for bankruptcy and whether filing under Chapter 7 or Chapter 13 is best for your financial situation. Regardless of which type of bankruptcy suits your needs, our skilled attorneys can represent your interests throughout the proceedings and ensure that you exit bankruptcy in the best possible financial position. Feel free to contact our lawyers to discuss whether filing for bankruptcy is the best way for you to stop creditor collection actions so that you can get a fresh start.
Give us a call at (951) 226-5294