What Is The Difference Between Chapter 7 And 13 Bankruptcy?

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Bankruptcy Basics

Bankruptcy is a legal process designed to help individuals and businesses manage overwhelming debt and get a fresh start. There are two primary types of bankruptcy for consumers: Chapter 7 and Chapter 13. Chapter 7 bankruptcy, often referred to as “liquidation” bankruptcy, does not require a payment but may involve the sale of nonexempt property by a bankruptcy trustee to pay off creditors. However, certain properties can be protected from being sold through bankruptcy exemption, allowing debtors to retain significant personal assets like clothing, furniture, and retirement accounts. On the other hand, Chapter 13 bankruptcy, known as “reorganization” bankruptcy, allows debtors to create a repayment plan to settle their debts over a period of time, typically three to five years, but you can usually keep your assets. Bankruptcy liquidation reorganization involves different processes, eligibility, benefits, and drawbacks, with liquidation typically involving the sale of nonexempt property and reorganization allowing debtors to retain their assets while making payments over time. Understanding these fundamental differences can help you determine which type of bankruptcy might be right for your situation.

What is a Chapter 7 Bankruptcy?

Chapter 7, also known as “liquidation” bankruptcy, will help you to clear out most of your unsecured general debts, including medical bills and credit cards. Bankruptcy exemptions allows you to retain essential items such as clothing, furniture, and your home during the bankruptcy process. You must meet certain income requirements and pass what is known as the “Means Test” to qualify for a Chapter 7 bankruptcy.

What is a Chapter 13 Bankruptcy?

Also known as a “reorganization” bankruptcy, Chapter 13 enables you to repay the debt you owe to lenders and creditors and restructure your finances. This option provides an opportunity to catch up on missed payments such as mortgage or car payments. Your property isn’t sold during a Chapter 13 protection, and you may also keep it if you successfully complete a court-mandated repayment plan. This is particularly beneficial for homeowners who are behind on their mortgage payments, as it allows them to catch up and avoid foreclosure.

After you complete the repayment plan (which usually lasts three to five years), any remaining unsecured debt, such as medical bills or credit card debt, may be wiped clear. However, debtors are required to pay unsecured creditors an amount comparable to the value of their nonexempt assets. This structured repayment plan can also allow for the reduction of the principal loan balance on secured debts, providing a pathway for individuals to manage their financial obligations while retaining their property.

What Are the Requirements to File Chapter 7 or Chapter 13 Bankruptcy?

Before filing for bankruptcy, it’s important to understand the qualifications for Chapter 7 and Chapter 13 bankruptcy. Each has distinct requirements tailored to different financial situations.

Requirements for Chapter 7 Bankruptcy

1. Pass the Means Test:

   • The means test determines eligibility based on income. If your income exceeds the state median for a household of your size, you may not qualify for Chapter 7.

2. Limited Options for Secured Debts:

   • Chapter 7 primarily handles unsecured debts and offers fewer options for managing secured debts like mortgages or car loans.

3. Exempt Property Limits:

   • The amount of property you can keep is subject to state exemptions, which vary by location. Any assets exceeding the exemption limits may be sold to repay creditors.

Requirements for Chapter 13 Bankruptcy

1. Feasibility of the Payment Plan:

   • To qualify, you must demonstrate that your income and budget can support the proposed repayment plan over 3 to 5 years.

2. Plan Confirmation by the Court:

   • The judge will approve the repayment plan only if it satisfies a series of legal requirements, including ensuring priority debts (e.g., taxes, child support) are paid and that the filer has sufficient income to make the payments.

What Types of Debt Can Be Discharged in Chapter 7 or Chapter 13 Bankruptcy?

When considering bankruptcy, understanding what debts can be discharged is crucial. Here’s a breakdown of how Chapter 7 and Chapter 13 bankruptcy handle different types of debt:

Debts Discharged in Chapter 7 Bankruptcy

Chapter 7 bankruptcy typically eliminates most unsecured debts, such as:

• Credit card balances

• Medical bills

• Personal loans

• Certain older tax obligations

However, some debts are not dischargeable under Chapter 7, including:

• Recent IRS debt

• Child support and alimony

• Student loans (in most cases)

• Equitable distribution from divorce settlements

• Other exceptions outlined in the bankruptcy code

Debts Discharged in Chapter 13 Bankruptcy

Chapter 13 bankruptcy stands apart due to its broader discharge capabilities. Known for offering a “super discharge,” Chapter 13 can eliminate certain debts that Chapter 7 cannot, such as:

• Some tax obligations

• Specific types of alimony or spousal obligations

• Additional debts categorized under exceptions in the bankruptcy code

Chapter 13 bankruptcy can assist in repaying tax debt over a set period, providing a structured approach to manage these obligations. The repayment plan in Chapter 13 also allows debtors to address priority debts (like recent taxes or child support) through structured payments, often making it a more comprehensive solution for those with complex financial situations.

What Can You Keep in Chapter 7 and Chapter 13 Bankruptcy?

One of the biggest concerns for individuals considering bankruptcy is what property they’ll be able to keep. Here’s how Chapter 7 and Chapter 13 bankruptcy handle your assets:

Keeping Property in Chapter 7 Bankruptcy

In Chapter 7, you can eliminate most of your debts, but you may have to surrender some property beyond essential items. Bankruptcy exemptions, which vary by state, allow you to keep certain types of property considered necessary for daily living.

In Florida, these exemptions often include:

• Your primary residence (protected under Florida’s generous homestead exemption)

• Retirement accounts like 401(k)s and IRAs

• Basic household belongings and furnishings

• Essential vehicles, subject to certain value limits

The specific exemptions you qualify for depend on your situation and state laws, so consulting an experienced bankruptcy attorney is critical.

Keeping Property in Chapter 13 Bankruptcy

Chapter 13 bankruptcy allows you to keep virtually all your property, regardless of its value. However, the amount of non-exempt property you retain may influence the monthly payment required in your Chapter 13 repayment plan. This makes Chapter 13 an excellent option for individuals with valuable assets they wish to protect while addressing their debt.

Repaying Creditors

In Chapter 7 bankruptcy, the process of repaying creditors involves the liquidation of nonexempt property. A bankruptcy trustee is appointed to administer the debtor’s nonexempt assets, with the proceeds distributed to unsecured creditors. This process helps to pay off as much debt as possible, though it may not cover all outstanding amounts.

Conversely, Chapter 13 bankruptcy focuses on reorganization rather than liquidation. Debtors propose a repayment plan to the bankruptcy court, detailing how they intend to repay their creditors over a specified period, usually three to five years. This plan must be approved by the court and is based on the debtor’s disposable income. By adhering to this plan, debtors can manage their debts more effectively while retaining their property.

Secured Debts

Secured debts are those backed by collateral, such as a mortgage or car loan. In Chapter 7 bankruptcy, these debts are not discharged, meaning the creditor retains the right to repossess the collateral if the debtor fails to make payments. This can result in the loss of significant assets like a home or vehicle.

In Chapter 13 bankruptcy, however, secured debts can be restructured. Debtors can include these debts in their repayment plan, allowing them to make manageable payments over time. This approach can help debtors keep their collateral, provided they adhere to the terms of the repayment plan. Understanding how secured debts are treated in each type of bankruptcy is crucial for making an informed decision about which path to take.

The Bankruptcy Process in Chapter 7 vs Chapter 13

In Chapter 7 bankruptcy, the court appoints a bankruptcy trustee to sell nonexempt property to pay off creditors. This type of bankruptcy is typically quicker, often concluding within a few months, and is aimed at discharging most unsecured debts.

In contrast, Chapter 13 bankruptcy involves creating a repayment plan that allows the debtor to pay back a portion of their debts over time, usually three to five years. This plan must be approved by the court and is based on the debtor’s disposable income. The structured repayment plan in Chapter 13 can help debtors manage their financial obligations while retaining their property, making it a viable option for those with a steady income and valuable assets.

How Do I Know Which Type Of Bankruptcy Is Right For Me?

Our firm will complete a comprehensive analysis in evaluating which chapter bankruptcy appears more appropriate. Usually we look at income, expenses, assets, and debts to figure out the right fit. For some people, they are forced to file only one chapter or another. So for example, if they make too much money, then they may not even qualify for a Chapter 7. In other instances, a potential filer might be eligible for both chapters, but there might be a specific benefit that would direct us more towards one chapter or the other. For example, Chapter 7 doesn’t offer any tools to help someone who is behind on their mortgage get caught back up, whereas Chapter 13 has several tools that allow for those opportunities. Sometimes, Chapter 13 allows the bankruptcy filer a certain amount of creativity, to where we may even be able to get rid of secondary mortgages, which is called lien stripping. We evaluate someone’s entire financial picture to help our clients decide which type of bankruptcy is right for them.

The type of bankruptcy you qualify for depends on how much you make and is handled in the best way possible that will appease the creditors and allow you to continue to live and provide for yourself and your family. Bankruptcy is never a clear-cut abandonment of your debts. No one can wave a magic wand and make your debts disappear. Instead, bankruptcy is an intricate process that can help you to get back on your feet and eliminate debt that you cannot afford. For more information on Bankruptcy In Florida, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling (727) 538-4188 today.

Conclusion

Bankruptcy can be a complex and overwhelming process, but it also offers a path to financial recovery for individuals and businesses burdened by debt. By understanding the basics of bankruptcy, including the differences between Chapter 7 and Chapter 13, and how creditors are repaid, you can make more informed decisions about your financial future. If you are considering bankruptcy, consulting with a qualified bankruptcy attorney is essential to determine the best course of action for your specific situation. A professional can guide you through the intricacies of bankruptcy filing, ensuring that you take the right steps toward regaining financial stability.