The Bankruptcy Code allows for several different forms of bankruptcy. The different types of bankruptcy are contained in specific “chapters” of the Code. Chapter 7 and Chapter 13 are the two most common forms of bankruptcy because these are the chapters most appropriate for everyday people. Obviously, the chapter that applies only to a city or county government, or the chapter that applies to farmers would not be relevant to a family struggling with credit card debt or a home foreclosure.
If you are considering filing a personal bankruptcy, then you should understand the basic differences between Chapter 7 and Chapter 13. Here are some of the major differences (and similarities):
Both Chapter 7 and Chapter 13 are forms of bankruptcy – we sometimes get calls from potential clients who want to compare ” bill consolidation vs. bankruptcy.” Please do not get confused about this – Chapter 13 is one type of bankruptcy and Chapter 7 is another type. Both are forms of debt relief described in the United States Bankruptcy Code.
A big part of what we do here at Ginsberg Law Offices involves helping our clients to decide if bankruptcy makes sense at all, and if it does, whether Chapter 7 or Chapter 13 is the appropriate choice.
Chapter 7 Basics
Chapter 7 is designed to wipe out debts. It is the fastest and most straightforward type of bankruptcy. Chapter 7 generally works best if you are burdened with a lot of unsecured debt – debts like credit cards, medical bills, and personal loans. When successful, which is most of the time, your Chapter 7 will discharge or wipe out all of your unsecured debt. You can sometimes file Chapter 7 even if you own a house, car or other hard assets. First, you must be current with your payments so the creditor will be willing to “reaffirm” its debt with you. Second, you are only allowed to reaffirm if your equity position in real or personal property falls within the Georgia exemption rules.
In other words, if you walk into my office owing thousands of dollars in credit card debt, thousands to a car lender for a repossession deficiency, and even old income tax debt, we can file a Chapter 7 and make all of that debt go away – truly a fresh start.
You may be thinking, “Chapter 7 sounds great, what is the catch?” The catch is that not everyone qualifies for Chapter 7. Generally, your income must be modest (in the range of around $68,000 annually for a family of 4, or around $40,000 for an individual) and you cannot own a lot of valuable property. For example, if you own a home with $50,000 of equity and you want to keep your home, Chapter 7 probably won’t work because the Georgia exemption laws only allow you to protect or “exempt” $21,500 of equity in real estate ($43,000 for a married couple). If you were to file a Chapter 7, the bankruptcy trustee would sell your home to liquidate the “non-exempt equity.”
The typical Chapter 7 client I see is a person or married couple that has recently lost income, has a lot of credit card debt, and wants to start over.
The big picture:
- Chapter 7 is designed to wipe out debts, whereas Chapter 13 is designed to repay debts. As such, Chapter 7 cases usually last about 5 or 6 months. You can start to rebuild your credit as soon as your Chapter 7 case is over.
- Chapter 7 works best when most of your debts are unsecured – such as credit cards, medical bills, repossession deficiency claims and personal loans.
- Chapter 7 can eliminate or reduce old tax debt.
- Chapter 7 allows you to surrender a home, vehicle or other secured property and avoid deficiency claims.
- Chapter 7 is generally only available if your household income is modest (around $65,000 annually for a family of 4). More than that, it is possible but more difficult.
- Chapter 7 usually works best if your income is unstable or if you are currently unemployed.
Although it is rare if we plan your Chapter 7 properly. A creditor might object to your Chapter 7 case if you ran up a lot of credit card bills in the six months to a year prior to filing. Or, your bankruptcy can be challenged if you misrepresented your financial affairs in a personal financial statement.
If a creditor does object, we can usually negotiate a partial payment plan for that particular debt. You also have the opportunity to convert your case to a Chapter 13 repayment plan.
Chapter 13 Basics
Chapter 13 operates as a court supervised payment plan. Unlike Chapter 7, the purpose of Chapter 13 is not to eliminate debts but to pay some or all of those debts back over time. When we file your Chapter 13 case, we include a proposed plan of repayment. This “Chapter 13 plan” creates several classes of creditors ranging from “general unsecured” to “secured” to “priority.” We also propose monthly payment amounts for each class of creditor.
Unsecured debt like credit card bills and medical debt often gets paid less than 100% and interest is usually not paid to unsecured creditors in a Chapter 13.
Chapter 13 plans may not last more than five years (60 months). Our job as your lawyer is to calculate a plan payment that you can afford and that pays creditors according to what the law requires.
Chapter 13 is perhaps best known for its capacity to stop mortgage foreclosures and repossessions. You can use your Chapter 13 plan to “cure” arrearages and keep most or all of your assets.
The typical Chapter 13 client I see is a person or married couple who fell behind because of a temporary income interruption but who cannot catch up and needs time and a little breathing space.
Sometimes we find that a particular client would be eligible for either Chapter 7 or Chapter 13. Other times only one Chapter makes sense, or bankruptcy does not offer any significant benefit. Either way, we are happy to review your personal debt situation and make a recommendation.
The big picture:
- Chapter 13 can help you restructure your debt if you are facing foreclosure or repossession. You can include your mortgage arrearage (past due mortgage payments) and remaining vehicle balance in your Chapter 13 plan.
- You can usually include past due tax debt in Chapter 13 and pay back under more generous terms than if you dealt directly with the IRS.
- Chapter 13 will stop a foreclosure (with limited exceptions for repeat filers) even if you wait until the very last minute.
- Chapter 13 will stop a repossession, and if your car has already been repossessed, you can probably get it back if you file Chapter 13
- Chapter 13 can improve your monthly cash flow, reduce your total debt or both – in a repayment plan.
- Because Chapter 13 calls for a payment plan, the typical case will last about 5 years. This means that you cannot start to rebuild your credit for 5 years from the date you file.
- Chapter 13 works best if you have a regular, steady income.