Chapter 7 and Chapter 13 bankruptcy offer different benefits for debtors
By Barbara Craig, Attorney at Law
The difference between chapter 7 and chapter 13 bankruptcies may seem subtle at first glance, but digging deeper reveals the differences are very significant.
What chapter 7 and chapter 13 bankruptcy have in common
Certain debts are not dischargeable under any bankruptcy case. Non dischargeable debts are: student loans; certain taxes; debts arising from acts of fraud; child support obligations; and judgments owed to victims of personal injury cases arising from debtors intoxicated due to use of alcohol or drugs, to name a few.
Secured debts — like car loans and mortgages — which have been reaffirmed also survive a bankruptcy case. A debt is reaffirmed by signing and filing a reaffirmation agreement with your lender stating that you agree to re-establish the debt or loan that existed before filing for bankruptcy.
Important differences between chapter 7 and chapter 13
The largest difference between a chapter 7 and chapter 13 is that under a chapter 7 bankruptcy, most debts are completely eliminated. In contrast, under a chapter 13 bankruptcy, debts are also eliminated — but only after repaying some or all of the debts over a lengthy period of time.
Another difference between chapter 7 and chapter 13 bankruptcies is the eligibility requirements. Chapter 7 debtors must have an income below the state median for their household size or be able to pass the Chapter 7 means test. Chapter 13 debtors must have enough income to cover the plan payments but also must not have unsecured debt in excess of $383,175 or secured debts in excess of $1,149,525. Businesses and Individuals are eligible to file chapter 7 cases but only individual debtors are allowed to file chapter 13 bankruptcy cases.
The other major difference between chapter 7 and chapter 13 is the timeline. Under a chapter 7 bankruptcy, all dischargeable debts are eliminated upon completion of the bankruptcy case, which is approximately 4 months from the filing date. Under chapter 13 bankruptcy cases, debtors get caught up on all missed payments and other non-dischargeable priority debts by making all plan payments, typically for five years (three years for low income debtors).
Benefits of choosing chapter 13 bankruptcy
Given the obvious benefits of chapter 7 bankruptcy, debtors frequently ask why an individual would choose chapter 13 instead. Under a chapter 13 bankruptcy, when a person owns property but owes more than the property is worth, it is possible to cancel a second or third mortgage on the property — called lien striping — or lower the principle balance on it — called cramdown — while simultaneously eliminating other debts. These actions are not possible under a chapter 7 case.
The difference between chapter 7 and chapter 13 bankruptcy cases are significant and must be carefully considered when determining the best solution for your financial needs. If you are contemplating bankruptcy, Contact Bankruptcy Attorney Barbara Craig to schedule a free consultation. Serving clients in the South Bay area including Torrance, San Pedro, Lomita, Harbor City, Carson, Wilmington, Long Beach and other nearby communities.
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