“Can you explain to me the difference between a Chapter 7 and a Chapter 13 bankruptcy?”
Well folks, I am often asked this question and while I am more than happy to answer it, it requires us to go back to Bankruptcy 101.
Let’s start with Chapter 7 Bankruptcy…..
A person must first make sure they qualify before applying. A person will qualify for Chapter 7 relief if: (1) his or her income does not exceed the median income level for the state in which he or she resides; or (2) if her income is above the state average, the “means test” is met. In addition to the income requirement, before a person can file for bankruptcy, he must receive credit counseling from an agency approved by the United States Trustee’s office.
If you’re ready to find out if you qualify for Chapter 7 relief, the first step is to prepare the petition. Preparing a bankruptcy petition can be overwhelming and confusing which is why we suggest you let an experienced bankruptcy attorney help you with this process. There are a number of detailed rules and procedures that must be followed to ensure that your petition is properly filed with the court and that the allowable exemptions are maximized.
Once a petition has been properly filed, the court will appoint a trustee to be assigned to your case to collect all “non-exempt property”, from which it will take these assets and distribute the proceeds to the appropriate creditors. This does not mean that a trustee will take all of the assets from him. In fact, a person filing under chapter 7 may even qualify to reaffirm specific debts that would then be exempt from capture and repayment by the trustee. For example, by signing a reaffirmation agreement, a debtor can continue to pay a car loan or a mortgage on his home.
Under Chapter 7, the debtor makes no payment to the trustee for its services and the filing debtor receives a discharge of all dischargeable debts.
So what is a chapter 13 bankruptcy……….
Chapter 13 bankruptcy is sometimes called a reorganization bankruptcy and is very different from Chapter 7 bankruptcy. In a Chapter 7 bankruptcy, most debts are discharged and the person is given a “clean slate” to start over. However, those individuals who do not qualify for Chapter 7 bankruptcy, or those who wish to retain valuable assets, may seek financial relief through a Chapter 13 bankruptcy filing. In a Chapter 13 bankruptcy, a person does not surrender any instead, you must use your income to pay some or all of what is owed to creditors, usually on a three- to five-year payment plan.
The length of a person’s payment obligation will depend on how much they earn relative to how much they owe. If a person’s average monthly income during the six-month period prior to the filing date of a Chapter 13 bankruptcy petition is greater than the median income for his or her state, he or she will be required to prepare and propose a payment plan of five years. However, if a person’s income is below the median, they can propose a payment plan over three years.
No matter how much you earn, your plan will end if you pay all of your debts in full, even if you haven’t reached the three-year or five-year mark yet.
Chapter 13 bankruptcy is not for everyone. Because Chapter 13 requires you to use your income to pay some or all of your debt, you will need to show the court that you can meet your payment obligations. If your income is irregular or too low, the court may not allow you to file for Chapter 13.
If your total debt load is too high, you’re also not eligible. Your secured debts cannot exceed $1,010,650 and your unsecured debts cannot exceed $336,900. A “secured debt” is one that gives the creditor the right to take a specific item of property (like your house or car) if you don’t pay the debt. An “unsecured debt” (such as a credit card) does not 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 the most complicated aspect of a Chapter 13 filing is the payment plan. This is a detailed list that will accurately describe how a person will pay off 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 payment plan documents.
A Chapter 13 plan is required to pay certain debts in full. These debts are called “priority debts” because they are considered significant enough to move to the top of the bankruptcy line. Priority debts include child support, alimony, wages you owe to employees, and certain tax obligations.
In addition, your plan should include your regular payments on secured debts, such as a mortgage or car loan, as well as payment of any arrears (amount(s) past due) on the debts.
A payment plan should also illustrate that any disposable income a person has left over after making required payments will be used to pay off any unsecured debt, such as credit cards. It should be noted that a person will not be required to pay these debts in full or at all in some cases.
If for any reason a person is unable to terminate a Chapter 13 payment plan, if circumstances warrant, the bankruptcy trustee has the power to modify the plan, or a court may discharge the remaining debts in full if it can be shown “difficulties”. If the bankruptcy court does not allow you to modify your plan or give you a hardship discharge, you may be able to switch to a Chapter 7 bankruptcy or request court permission to dismiss your Chapter 13 bankruptcy, in which case a person will still owed any remaining debt, plus interest(s) to creditors discharged while the Chapter 13 case was pending.