There are many decisions to make when filing for personal bankruptcy, not the least of which is what type of bankruptcy - should you liquidate your assets through Chapter 7 bankruptcy or create a payment plan through Chapter 13 bankruptcy? Are you even eligible to file for bankruptcy under Chapter 7 of the U.S. Bankruptcy code?
An experienced Los Angeles bankruptcy attorney can help you understand the differences between the two forms of bankruptcy and help determine what is the most practical option for you. Below is a brief comparison of the two types of bankruptcy:
In a Chapter 7 bankruptcy, a bankruptcy trustee will be appointed to liquidate your non-exempt assets (property) and distribute the money received from liquidation among your creditors. Some property is exempt from bankruptcy (see our previous blog on bankruptcy exemptions). After the bankruptcy is complete, the debtor is left relatively debt-free.
Under Chapter 13 bankruptcy, the debtor pays back creditors through a three- to five-year repayment plan. The debtor can retain his or her assets, but must make payments from his or her disposable income. During the payment period, creditors may not start or continue collection efforts against the debtor.
In order to file bankruptcy under Chapter 7, the debtor must pass the Chapter 7 means test. Generally, a debtor's monthly income must be less than the state median to qualify for Chapter 7; however, there are exceptions.
As of January 2012, individuals are eligible for Chapter 13 bankruptcy if they have unsecured debts less than $360,475 and secured debts less than $1,081,400.
Most pre-petition debts will be discharged through Chapter 7 bankruptcy. This means that debtors will not have to pay on their debts once the court has entered a discharge order. Some debt is not dischargeable, such as student loans, child support arrears and tax debt.
Depending on the repayment plan of a Chapter 13 bankruptcy, all or a portion of your debts will be discharged once you have completed the plan and the court has entered a discharge order.
As long as you keep up your mortgage payments and your home meets that California homestead exemption, you will not lose your home in a Chapter 7 bankruptcy.
In Chapter 13, if your bankruptcy plan is successfully completed and you do not have significant non-exempt equity in the home, you will be able to keep your home.
Your car may or may not be taken to pay back creditors in a Chapter 7 bankruptcy, depending on whether it falls under the California bankruptcy exemptions and whether you have made an agreement to pay off the lien.
In a Chapter 13 bankruptcy, you can keep your car if you are able to successfully complete the plan and make payments on the car.
Chapter 7 bankruptcy remains on a credit report for up to ten years after the date you file for bankruptcy.
Chapter 13 bankruptcy also remains on a credit report for up to ten years after the date you file for bankruptcy, but some creditors may only report the bankruptcy for seven years.
Source: American Bar Association, "General Comparison of Chapter 7 and Chapter 13 bankruptcy."