“Can you please explain to me, what is the difference between a chapter 7 and chapter 13 bankruptcy?”
Well folks, I am often asked this question and, while I am more than happy to answer it, it requires that we go back to Bankruptcy 101.
Let’s start with chapter 7 Bankruptcy…..
A person must first make sure that they qualify before filing. A person will qualify for Chapter 7 relief if either: (1) their income does not exceed the median income level for the state in which they reside; or (2) if their income is over the state median, the “means test” is satisfied. In addition to the income requirement, before a person can file for bankruptcy, they must receive credit counseling from an agency approved by the United States Trustee’s office.
If you are ready to find out if you qualify for Chapter 7 relief, the first step is preparing the petition. Preparing a bankruptcy petition can be overwhelming and confusing and that is why we suggest that you let an experienced bankruptcy attorney assist you with this process. There are a number of detailed rules and procedures that must be followed to ensure that your petition is filed correctly with the court and that you allowed exemptions are maximized.
Once a petition is properly filed, the court will appoint a trustee who will be assigned to your case to collect all “non-exempt property,” of which he or she will take these assets and distribute proceeds to appropriate creditors. This does not mean that a trustee will take all of your assets. In fact, a person filing pursuant to chapter 7 may even qualify to reaffirm specific debts which would then be exempt from capture and repayment by the trustee. For instance, by signing a reaffirmation agreement a debtor can continue to pay for a car loan or a mortgage on their home.
Under Chapter 7, the debtor does not make a payment to the trustee for his or her services and a filing debtor receives a discharge on all dischargeable debts.
So, then what is a chapter 13 bankruptcy……..
Chapter 13 bankruptcy is sometimes referred to a reorganization bankruptcy and is very different from Chapter 7 bankruptcy. In a Chapter 7 bankruptcy, most debts are discharged and a person is given a “clean slate” to start over. However, those persons that do not qualify for Chapter 7 bankruptcy, or those that want to retain valuable assets, may nonetheless seek financial relief through a Chapter 13 bankruptcy filing. In a Chapter 13 bankruptcy, a person does not hand over any property, but must instead use their income to pay some or all of what is owed to creditors generally over a three to five year repayment plan.
The length of a person’s repayment obligation will be dependent on how much they earn in relation to how much they owe. If a person’s average monthly income over the preceding six month period prior to the date a Chapter 13 bankruptcy petition is filed is more than the median income for their state, they will be mandated to prepare and propose a five-year repayment plan. If however, a person’s income is lower than the median, they may propose a repayment plan over three years.
No matter how much you earn, your plan will end if you repay all of your debts in full, even if you have not yet reached the three- or five-year mark.
Chapter 13 bankruptcy isn’t for everyone. Because Chapter 13 requires you to use your income to repay some or all of your debt, you’ll have to prove to the court that you can afford to meet your payment obligations. If your income is irregular or too low, the court might not allow you to file for Chapter 13.
If your total debt burden is too high, you are also ineligible. Your secured debts cannot exceed $1,010,650 and your unsecured debts cannot be more than $336,900. A “secured debt” is one that gives a creditor the right to take a specific item of property (such as your house or car) if you don’t pay the debt. An “unsecured debt” (such as a credit card) doesn’t give the creditor this right.
Like Chapter 7, before a person can file for Chapter 13 bankruptcy, they must receive credit counseling from an agency approved by the United States Trustee’s office.
The most important and unfortunately most complicated aspect of a Chapter 13 filing is the repayment plan. This is a detailed list that will describe precisely how a person will repay each of their debts. There is no official form for the plan and therefore it is strongly recommended that you seek the advice of an experienced bankruptcy attorney when preparing your repayment plan documents.
A Chapter 13 plan is required to pay certain debts in full. These debts are called “priority debts,” since they are considered adequately important to move to the head of the bankruptcy repayment line. Priority debts include child support, alimony, wages you owe to employees and certain tax obligations.
In addition, your plan must include your regular payments on secured debts, such as a mortgage or an auto loan, as well as repayment of any arrearages (past due amount(s)) on the debts.
A repayment plan must also illustrate that any disposable income a person has left after making required payments will go towards repaying any unsecured debts, such as credit cards. It should be noted that a person will not be required to repay these debts in full or at all in some cases.
If for some reason a person cannot finish a Chapter 13 repayment plan, if circumstances are warranted, the bankruptcy trustee has the power to modify the plan, or a court may discharge the remaining debts in full if “hardship” can be demonstrated. If the bankruptcy court won’t let you modify your plan or give you a hardship discharge, you might be able to change to a Chapter 7 bankruptcy or seek permission from the court to dismiss your Chapter 13 bankruptcy, of which case a person would still owe any remaining debts, plus interest(s) creditors discharged while the Chapter 13 case was pending.