Chapter 7 vs. Chapter 13
The Chapter 7 Bankruptcy and Chapter 13 Bankruptcy are The Two Most Common Types of Bankruptcy Filed in South Florida.
We will be discussing two of the most common types of bankruptcy filed in South Florida. Chapter 7 and Chapter 13 – these bankruptcies are largely filed by an individual or married consumers with unaffordable consumer debt. For Instance, credit card debt, medical bills, home loans, car loans, and the like. The names “Chapter 7” and “Chapter 13” refer to the corresponding chapters in the bankruptcy code that outline the specific laws related to each type of bankruptcy. Although Chapter 7 of the bankruptcy code and Chapter 13 of bankruptcy code offer different legal remedies for borrowers. Borrowers are also known as “debtors” in the bankruptcy world. Both chapters offer tremendous benefits when you fall behind or simply no longer have means to pay all your bills.
Chapters Difference
Firstly, In Chapter 7 bankruptcy, a panel trustee is randomly assigned to search for non-exempt assets and monetize these assets for the benefit of your unsecured creditors. However, in a Chapter 13 bankruptcy, non-exempt assets are not liquidated by a trustee. If you have non-exempt assets you want to keep, you can simply pay their non-exempt value over life of your Chapter 13 plan. This allows you to retain your property through the bankruptcy process. Rather than potentially having to turn such property over to a Chapter 7 trustee for liquidation. In addition, Chapter 13 bankruptcy allows you to restructure your secured debt (like a home mortgage or car loan). By making up the amount you are behind (known as “arrears”) throughout your three to five-year Chapter 13 plan.
Many people ask “what is the difference between Chapter 7 and Chapter 13 bankruptcy”? To sum it up, A Chapter 7 bankruptcy filing turns your estate over to a bankruptcy trustee, who seeks to liquidate the value of your “non-exempt assets” for the benefit of your creditors. The entire Chapter 7 process typically lasts about three to five months. In a Chapter 13 bankruptcy, a plan is filed that seeks to restructure your secured debts and/or pay your unsecured creditors some amount of money over time. Meanwhile, the Chapter 13 plan usually spans three to five years.
Chapter 7
A Chapter 7 bankruptcy is typically over within just a few months of filing your Chapter 7 petition and schedules. It can eliminate your credit card debts and other typically dischargeable debts within this short time frame. However, you must qualify for Chapter 7, which you do by taking the Chapter 7 means test. (It should be taken care of by experienced bankruptcy attorney because of its complex set of calculations. If interested in additional information, call us and we can further explain during a free phone consultation).
Generally, if your income is below the Chapter 7 income limits and you pass the Chapter 7 means test, then you qualify for a Chapter 7 bankruptcy. Once you determine that you qualify for Chapter 7 bankruptcy, you must then consider the exposure you have due to non-exempt assets that may be at risk through the Chapter 7 bankruptcy process. Remember, in a Chapter 7 bankruptcy filing, a court-appointed trustee can sell your non-exempt property (both real property and personal property) to pay your creditors.
Chapter 13
A Chapter 13 bankruptcy is a process whereby goal is to have a Chapter 13 plan confirmed by bankruptcy court. This plan typically last between 3-5 years (depending largely on whether you’re above or below Chapter7 income limit). During the Chapter 13 plan period, you must pay your unsecured creditors the higher of i) the amount you would have lost in a Chapter 7 bankruptcy (i.e., the value of your non-exempt assets) and ii) what you can afford to pay (which we will help you determine and keep to the minimum amount required under the law, based on your household’s specific finances).
To qualify for Chapter 13 bankruptcy, you must have enough income to afford the minimum payment described above, and your total debts generally must be below the Chapter 13 debt limits (which changes over time, but is currently around $400,000 for unsecured debt and about $1.1 million for secured debts), but not all debt must be included when considering the Chapter 13 debt limits. Call now for a free 15-minute phone consultation with an experienced bankruptcy attorney to gain a better understand your bankruptcy alternatives. We look forward to helping you.
We will of course develop your Chapter 13 plan for you after understanding your financial challenges and objectives. To have your Chapter 13 plan become your new official contract with your creditors, the bankruptcy court must confirm (approve) the Chapter 13 plan. All of your Chapter 13 plan payments will be paid to the Chapter 13 trustee. And the trustee will disburse the payments to your creditors under the details of your Chapter 13 plan. The bankruptcy court will enter an Order of Discharge once you finish paying the plan. And the remaining unpaid balance of your unsecured debt will be discharged.
Chapter 7 | Chapter 13 | |
Case duration (typical case) | 3 to 4 Months | 3 to 5 Years |
Eligibility | Must have household disposable income below the median income for a family your size, or pass the Chapter 7 Means Test. | Must have some form of “regular income”. In addition, your “liquidated” and “non-contingent” debts must be below the Chapter 13 debt limits. |
Protection from Creditors via Automatic Stay (like stopping foreclosures, car repossessions, lawsuits, and collection calls)? | Yes, but protection is short-term only. | Yes, and protection can be long-term through a Chapter 13 plan. |
Non-exempt Assets Exposed? | Yes, the trustee may liquidate or monetize non-exempt assets. | No, but you must pay the non-exempt value over the life of your Chapter 13 plan to retain the non-exempt property. |
Right to Voluntarily Dismiss? | No | Yes, absent bad faith |
Right to restructure secured debt, like a home mortgage or car loan? | No – Chapter 7 is a liquidation Chapter and offers no rights to restructure debt | Yes, secured debts can be restructured through a confirmable Chapter 13 plan |
Do Unsecured Creditors get paid back in full (like credit card bills, personal loans, and medical bills)? | No – unsecured creditors just receive their pro-rata share of the non-exempt assets and other claims that the Chapter 7 trustee monetizes on their behalf (the “Chapter 7 Liquidation Value”) | No – The Unsecured Creditors only receive what they would be expected to receive in a Chapter 7 bankruptcy (the “Chapter 7 Liquidation Value”), unless you can afford to pay more. |
Are debts dischargeable? | Yes – assuming you proceed in good faith, you should receive an Order of Discharge from the bankruptcy court within about 90 days after filing the case. The Order of Discharge formally discharges your dischargeable debt (tax-free) and protects you from creditor collections attempts on such debt. | Yes – you should receive an Order of Discharge from the bankruptcy court shortly after completing your plan payments if you proceed in good faith. The Order of Discharge formally discharges your dischargeable debt (tax-free) and protects you from creditor collections attempts on such debt. |
Are the same debts dischargeable in Chapter 7 as in Chapter 13? | No – Chapter 13 has a “super discharge”, which broadens the debt subject to discharge. So, certain debts are dischargeable in a Chapter 13 bankruptcy that is not dischargeable in a Chapter 7 bankruptcy. | No – The Chapter 13 has a “super discharge”, which widen the debt subject to discharge. For example, some debt created through a divorce or separation agreement may be dischargeable in Chapter 13, but not in Chapter 7. Also, civil fines and penalties are dischargeable in Chapter 13, but not in Chapter 7. |
Are judgment liens on my home or car removed in the bankruptcy? | All liens pass through bankruptcy unaffected unless specific action is taken within the case. If the judgment lien is impairing exempt property, it can be avoided or “stripped” from the exempt property it impairs. This is true in both Chapter 7 and Chapter 13. | All the liens pass through bankruptcy unaffected unless a particular action is taken within the case. If the judgment lien is impairing exempt property, it can be avoided or “stripped” from the exempt property it impairs. This is true in both Chapter 7 and Chapter 13. |
Are secured liens, like a home equity line of credit (HELOC) or HOA lien, removed or adjusted in the bankruptcy? | No – The voluntary secured liens like HELOCs & HOA liens cannot be removed or restructured in Chapter 7 bankruptcy. | Yes – voluntary secured liens like HELOCs and HOA liens can be removed or “stripped” in Chapter 13 bankruptcy if the lien has no equity when the case is filed. Voluntary secured liens on investment property and vehicles (like your standard car loan) can be “crammed” to the amount of equity the lienholder has in the property. This can be done only in Chapter 13 bankruptcy through the Chapter 13 plan. |
Will your business be affected by bankruptcy? | In Chapter 7, any interest you own in a business is subject to liquidation by the Chapter 7 trustee to monetize the value of your non-exempt assets. | In Chapter 13, you may continue to operate your business. It is essentially treated like any other non-exempt asset, which you retain in Chapter 13 if you pay the non-exempt value out over the life of your Chapter 13 plan. |
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