Chapter 7 Bankruptcy & Chapter 13 Bankruptcy Compared

 
 

QUESTIONS

CHAPTER 7 BANKRUPTCY

CHAPTER 13 BANKRUPTCY

Qualification to file a case: Individuals & married couples who pass the “means test” or whose debts are primarily business related, corporations or partnerships can file Chapter 7 bankruptcy. Married or unmarried Individuals, people who cannot qualify for Chapter 7 bankruptcy and people who own businesses can file Chapter 13 bankruptcy provided they otherwise qualify. A debtor cannot owe not more than $383,175 of unsecured debt and not more than $1,149,525 of secured debt to qualify to file a Chapter 13 bankruptcy. Partnerships and corporations cannot use Chapter 13 for reorganization.

 

Advantages of Chapter 7 Bankruptcy & Chapter 13 Bankruptcy: Chapter 7 bankruptcy will stop a foreclosure until discharge or relief from the automatic stay restraining order is granted. Chapter 7 bankruptcy stops all collection actions like law suits, wage garnishment, repossession, creditor harassment & tax levies.

Chapter 7 is basically used for getting out of debt.

A Chapter 7 bankruptcy eliminates debts that are unsecured like credit card debts, personal loans, store cards, medical bills, sold out 2nd mortgage holders & deficiency judgments after a car repossession. It also eliminates debt secured with possessions like furniture, homes & vehicle loans if you give up the secured item.

Chapter 7 bankruptcy does not eliminate most taxes, student loans, family support obligations. Liability to ex-spouses to indemnify them for debt that a family law court ordered paid by you is not discharged. Nor are debts from fraud, intentional injuries or damages for driving under the influence of drugs or alcohol discharge.

 

Chapter 13 bankruptcy will stop foreclosure and all activity where creditors are trying to take your money or assets while you are in a Chapter 13 bankruptcy debt consolidation /reorganization plan. This Chapter 13 bankruptcy protection can last as long as 5 years if needed.

Chapter 13 bankruptcy allows you to set up a debt management plan where you can keep all your assets and pays off all foreclosure arrears & all secured debt on vehicles furniture, appliances. Then it pays all priority debt like taxes.

Finally Chapter 13 bankruptcy pays as little as nothing to as much as 100% of your unsecured debts such as credit card debts, personal loans, medical bills and damages from accidents with no interest.

If there is non-exempt equity for unsecured creditors in a Chapter 7 bankruptcy that exceeds the unsecured debt than the unsecured will be paid in full with prime rate interest. Otherwise, the unsecured is paid no interest at all in a Chapter 13 bankruptcy plan.

When you complete your Chapter 13 bankruptcy you will normally be debt free except your home mortgage and student loans. Even debts that creditors claim were incurred by fraud are discharged. The same is true of the right of an ex-spouse to be indemnified based on a Family Law Court which is discharged as well.

Method to accomplish goals: Chapter 7 bankruptcy liquidates any property not protected by bankruptcy exemptions. A debtor gets a discharge of unsecured debts as well as secured debts .

 

Monthly plan payments are made to a Chapter 13 bankruptcy Trustee followed by a discharge of the debtor when the Chapter 13 bankruptcy reorganization plan is completed.
Length of time in bankruptcy: Chapter 7 bankruptcy typically lasts 3 to 4 months from filing to a discharge order. Chapter 13 bankruptcy reorganization plans run from 36 months minimum (unless all debt to be paid through plan including 100% to unsecured creditors has been paid) to 60 months maximum. The length of the Chapter 13 bankruptcy plan depends on the “Means Test”, actual income and/or time needed to accomplish the Chapter 13 plan goals.

 

Creditors get paid if: There are non-exempt (unprotected) assets. Some debts (but not necessarily all debts) will be paid through the Chapter 13 bankruptcy plan. Amounts paid to taxes and unsecured debts must be equal to non-exempt (unprotected) assets that would have been taken in a Chapter 7 bankruptcy.

 

Source for payment to creditors: Distribution of funds obtained by a Chapter 7 Trustee converting non-exempt assets into cash. Distribution of net income of debtor during the Chapter 13 bankruptcy reorganization plan, after deducting allowed living expenses. Sometimes a sale or refinance of assets may also be used. Unfortunately you cannot refinance a home & lien strip the second mortgage before you get a discharge order when you complete the Chapter 13 bankruptcy reorganization plan.

 

How will available funds if any, be distributed to creditors and in what order? Priority unsecured claims (typically taxes) will be paid first. Any remaining funds will be paid pro rata (i.e. same percentage paid) to all general unsecured creditors. Priority unsecured claims (taxes) paid at least 100%. General unsecured claims paid as you can afford, but no less than they would get in Chapter 7 bankruptcy. Amounts you are behind on  long term debt mortgage debt is paid through the Chapter 13 plan if you are keeping the home. In some Bankruptcy Court Districts you must also pay the ongoing mortgage through the Chapter 13 bankruptcy plan. Secured claims that become due in full within the plan length are paid in full. Secured creditors get interest.

 

Can a mortgage be avoided or stripped off real property like a home? No. However, there may sometimes be other ways to get rid of 2nd mortgage debts other than in a Chapter 7 bankruptcy. Yes, a mortgage can be stripped off a home in a Chapter 13 bankruptcy plan but only if there is no equity protecting the mortgage to be stripped. A first mortgage cannot be stripped off your home. Other properties with mortgages can be stripped down to the fair market value of the property only if the amount left can be paid in full in the Chapter 13 plan.

 

     Please recognize that these are general statements to which there are many exceptions too complicated to explain here. It should not be construed or relied upon as legal advice or analysis and is used solely at the reader’s risk. You should consult a competent, experienced Bankruptcy attorney, preferably a bankruptcy specialist.

 

     Chapter 7 Bankruptcy vs. Chapter 13 Bankruptcy comparison chart prepared by Gary Ray Fraley, California State Bar Board of Legal Specialization Certified Bankruptcy Law Specialist.

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