If you have fallen into debt in California, you can opt to file for bankruptcy. The most common types of bankruptcy filed are Chapter 7 & Chapter 13. These two kinds of bankruptcies work differently. They also differ in several other aspects. You will have to talk to an attorney to help you decide what type of bankruptcy works best for the financial situation in which you are in. The attorney may also help you with the process of filing for bankruptcy, so it becomes easier for you financially.
For Los Angeles residents, speak to the attorneys from the Los Angeles Bankruptcy Attorney if you have any bankruptcy-related issues. In this article, we focus on the different ways in which Chapter 13 and 7 bankruptcies work and in what aspects they differ.
How Bankruptcy Under Chapter 7 Works
A Chapter 7 bankruptcy is also referred to as liquidation bankruptcy. This type of bankruptcy helps you clear most of the unsecured debts. For instance, you can wipe out medical bills and credit card arrears without having to repay balances via a repayment plan. A Chapter 7 bankruptcy can be filed by a corporation, partnership, individual, or other business entities. And for you to qualify to file this form of bankruptcy, you have to meet the set income requirements. In case you make a lot of money, you may be required to go for Chapter 13.
Once you file a Chapter 7 bankruptcy, the court issues an automatic stay order. This order stops, with immediate effect, your creditors from collecting. Additionally, the court appoints a trustee to manage your case. The work of the trustee is reviewing your bankruptcy documents and supporting papers. He/she also has the duty of selling the assets that you cannot protect through bankruptcy exemption (non-exempt property). These properties are sold to repay your lenders. If you do not have any non-exempt property, then your creditors will receive nothing.
A bankruptcy under Chapter 7 works best for the debtors that earn low income and have no or little assets to repay a portion or all of their debts. However, it may also work best for the debtors whose discharged debts exceed the worth of the sold property. This is especially so if the bankruptcy trustee applies the money to non-dischargeable debts like support arrearages and income tax. Also, in case your household expenditure is lower than the California median level, you qualify for a Chapter 7 bankruptcy.
In case your household expenditure is more than the median level, and you wish to go for a Chapter 7 bankruptcy, you should first pass a means test. This test evaluates whether or not you have sufficient disposable income to repay a portion of your arrears. Disposable income refers to the earnings you have left after catering for the necessary living costs. If you’re considered to have a way to pay back at least a portion of your arrears, you may be required to file your bankruptcy under Chapter 13.
Advantages of Bankruptcy Under Chapter 7
Filing a Chapter 7 bankruptcy has several advantages over Chapter 13. They include:
- It can lower your monthly load of debt repayment
If your debt is discharged in Chapter 7, you are no longer lawfully required to repay that debt. This means that you can direct the finances you used to pay towards the credit card debt or loan, for instance, to something else, like buying household necessities. Keep in mind that we have several exceptions to the kinds of debts that a Chapter 7 bankruptcy can discharge. Therefore we recommend that you contact a bankruptcy attorney before filing for this form of bankruptcy.
- It provides relief from the debt collectors
In case you cannot afford to repay your unpaid arrears, filing for bankruptcy under Chapter 7 could be helpful. It will help in preventing debt collectors from pursuing any action against you. After filing this form of bankruptcy, your lenders will be temporarily stopped from:
- Contacting you
- Collecting from you
- Continuing with a wage garnishment
- Continuing or starting a lawsuit against your property or you
- You can repay your arrears faster under a Chapter 7 Bankruptcy than Chapter 13
Whereas bankruptcy under Chapter 13 generally takes one between three and five years for them to finish repaying their debts, Chapter 7 usually takes approximately 90 to 120 days. This is inclusive of the period you will take to complete a course for credit counseling before filing for bankruptcy.
Despite the benefits, filing Chapter 7 bankruptcy also comes with a few shortcomings. They are:
- You may lose a few properties
One main drawback of filing a Chapter 7 bankruptcy is that you risk losing your assets. Based on the bankruptcy laws and whether or not there is equity in a given property, your property or cash will be lost.
- Your credit may be negatively affected
Another main disadvantage of bankruptcy under Chapter 7 is the adverse effect it will have on your credit. This form of bankruptcy can remain on your credit report for a maximum of ten years, counting from the day you filed for bankruptcy. However, this does not mean that you cannot take, for instance, a home loan, ever. But, it means you may be required to pay much more in terms of fees and interest rates when borrowing.
How Chapter 13 Bankruptcy Works
A Chapter 13 bankruptcy is also referred to as reorganization bankruptcy. This form of bankruptcy is meant for debtors that have a regular income and have adequate money left over every month to repay part of their debt. These debtors have to come up with a repayment plan through which they will repay their debt.
Although most people have many finances to be eligible for a Chapter 7 bankruptcy, they opt to go for a Chapter 13. This is because this form of bankruptcy has many advantages that Chapter 7 doesn’t offer. For instance, you may be capable of catching up on the missed mortgage repayments or strip the unsecured junior liens entirely from your home.
By filing for bankruptcy under Chapter 13, you will get to retain all your assets, including the non-exempt ones. However, you will have to repay your lenders an amount equivalent to the worth of your non-exempt assets. In return, you repay a portion or all your debt via the repayment plan that favors you and your debtor. The amount of money to pay depends on your expenses, income, and the kind of debt.
For you qualify for bankruptcy under Chapter 13, the following must be true:
- You should have regular income
- The sum of your unsecured debts should be below $394,725. Unsecured debts aren’t backed by security like a home or car. Examples of unsecured debts include medical and credit card debts.
- The sum of your secured debts should be less than $1,184,200. Secured debts are loans that are backed with collateral. The security for secured debts is your assets. For instance, your car is security for an auto loan while a home is collateral for a mortgage.
Generally, bankruptcy under Chapter 13 is meant for the debtors who:
- Have defaulted on a car or house payment and want to catch up on the missed payments so they can retain their assets
- Have non-dischargeable arrears like child support or alimony debts that they would like to repay in a period of three to five years
- Do not qualify for bankruptcy under Chapter 7 but want to be relieved of their debts. For example, if they are seeking to stop litigation, reduce credit card payment or prevent wage garnishment
Advantages of a Chapter 13 Bankruptcy
The benefits of bankruptcy under Chapter 13 include:
- In case you have enough earnings Chapter 13 bankruptcy may be a good option for you
To be eligible for filing for bankruptcy under Chapter 7, you will need to prove that you cannot repay your debts. Filing a Chapter 7 or Chapter 13 bankruptcy depends on your wages and the California median income obligations. For instance, if your present monthly earnings are more than the median income requirements for your family, you might not be permitted to file a Chapter 7 bankruptcy. Under these circumstances, Chapter 13 could be your best option.
- It can prevent foreclosure and debt collection processes
If you are a homeowner and are struggling to maintain it, filing for bankruptcy under Chapter 13 can be of help to you. A Chapter 13 bankruptcy can prevent the home foreclosure process. This way, you will have an opportunity to repay the defaulted mortgage payments. Also, in case you have arrears in collection, a Chapter 13 bankruptcy prevents your lenders from taking actions to attempt to collect from you.
- Chapter 13 can assist you in repaying your debt
A Chapter 13 bankruptcy can also avail more cost-effective and convenient way to pay back your debt. Under this form of bankruptcy, you will devise a plan that will help you to repay a portion or all of your arrears. Based on how your repayment plant is, you could make one lump-sum monthly payment towards your debts. Then, this consolidated payment will be distributed to your lenders. Also, your monthly payment of certain kinds of arrears may be reduced. This is so you may be able to repay them in the course of between three and five years repayment plan.
- It may not have a severe effect on your credit
Like in Chapter 7, filing for bankruptcy under Chapter 13 may harm one’s credit. A Chapter 13 bankruptcy can remain on one’s credit report for a maximum of seven years, counting from the day you file. However, certain lenders could view Chapter 13 more favorably compared to bankruptcy under Chapter 7. This could indicate that you paid back much of your arrears.
Chapter 13 bankruptcy also has its drawbacks. They include:
- The repayment may affect your budget
When you file a Chapter 13 bankruptcy, you may have to put as collateral your disposable earnings for the entire period the plan will last. This can be hard, especially if what you earn is variable.
- It takes longer to have your debts discharged
Filing for bankruptcy under Chapter 7 may help you to discharge your arrears faster. The same cannot be said for Chapter 13. In Chapter 13, the liability for your debt does not come to an end until your repayment plan is completed. Generally, the repayment plan lasts between three and five years.
If you cannot maintain your repayment plan, losing your assets and your Chapter 13 status is a possibility
If you are incapable of making your payments as per the repayment plan, your case may be converted to a Chapter 7 bankruptcy or dismissed. When this happens, it means you may again be at risk of losing your property, like your car or home.
The court may also convert the repayment plan to Chapter 7 or dismiss it entirely. This is especially so if you do not file the required taxes in the course of the case. Or, it could happen if you don’t pay your domestic support requirements like alimony and child support after filing a Chapter 13 bankruptcy.
The Differences in Summary
After reading these two forms of bankruptcy, you will realize that they differ in several aspects. Here are the main areas where these two differ:
- While Chapter 7 is a liquidation form of bankruptcy, Chapter 13 is a reorganization type of bankruptcy.
- Parties that can file Chapter 7 include individuals, partnerships, and corporations. Only individuals and sole proprietors can file a Chapter 13.
- In a Chapter 7 bankruptcy, disposable income has to be lower, enough so it passes the means test under this chapter. If you want to file bankruptcy under Chapter 13, you can’t have unsecured debts of over $400,000 or secured debts of over $1,200,000.
- Under a Chapter 7 bankruptcy, it takes you between three and four months for your debts to be discharged entirely. Under a Chapter 13 bankruptcy, a debt discharge happens after you complete all the plan payments. That is, between three and five years.
- Under a Chapter 7 bankruptcy, the bankruptcy trustee could sell all the non-exempt assets to repay creditors. As for Chapter 13, a debtor can retain all the property but has to pay the unsecured lenders an amount equivalent to the value of the non-exempt property.
- Chapter 7 bankruptcy doesn’t allow the removal of unsecured junior liens from the real property through stripping the lien. Chapter 13 allows the removal of liens by lien stripping if all the requirements are met.
- Chapter 7 allows lowering the principal balance of the loan on secured arrears but only on personal, tangible property. On the other hand, Chapter 13 allows this if all the requirements are met.
- Chapter 7 permits debtors to discharge qualifying debts faster and have a new start. Chapter 13 permits debtors to retain their assets and catch up on the defaulted mortgage, non-dischargeable priority debts, and car loan payments.
- In a Chapter 7 bankruptcy, a bankruptcy trustee may sell the non-exempt assets to repay your debt. In chapter 13, you have to make monthly payments to the bankruptcy trustee within a period of between three and five years.
- Unlike Chapter 13, Chapter 7 doesn’t provide ways to catch up on defaulted payments so that a debtor can prevent repossession or foreclosure.
- Unlike Chapter 7, a debtor may need to repay a given percentage of the general unsecured arrears.
- There is also a difference in car loans and mortgages under these forms of bankruptcy. Under a Chapter 7 bankruptcy, you may have to give back the car or home to your lender or arrange to pay the wholesale value of the items. Under Chapter 13, you may be allowed to retain the car or house if you remain current with the court-ordered payment system.
- Under a Chapter 7 bankruptcy, your debts may not be discharged in case your lender objects and can prove your debts are as a result of a past crime. The lender can show this through a previous court conviction. For Chapter 13, you’ll be required to repay the debts as part of the repayment plan. And, the balance can be cleared if the remaining debts aren’t fully paid by the end of the plan.
- Under a Chapter 7 bankruptcy, your debts for student loans, alimony, and child support won’t be discharged. You can’t evade support debts by filing a Chapter 7 bankruptcy. Under a Chapter 13 bankruptcy, if you can’t repay the debts by the time the repayment plan ends, you will still owe the outstanding balance even after bankruptcy ends.
Find a Los Angeles Bankruptcy Attorney Near Me
Declaring yourself bankrupt is a significant legal decision that may come with severe repercussions. Before you can file for bankruptcy, look into all the options you have. Weigh the advantages and disadvantages of each form of bankruptcy. If you have evaluated the situation you are in and realize you cannot afford to pay back your debts, we advise that you talk to an attorney. The attorney may help you to decide which type of bankruptcy will work for you. At Los Angeles Bankruptcy Attorney, we help Los Angeles clients who are seeking to file bankruptcy or have any other bankruptcy-related problems. Call us at 424-285-5525, and we will accord any help you need.