Chapter 7 or Chapter 13?

Bankruptcy allows consumers to settle some or all their debts under the protection of the bankruptcy court. There are two types of consumer bankruptcy – liquidation and reorganization.

Chapter 7 – Liquidation

Liquidation is a relatively quick procedure (generally taking 3 – 6 months to complete) that results in the discharge of unsecured debt. It is called “Liquidation” because the Trustee may seize and sell (“liquidate”) some of your assets to pay toward your debts.  If you have secured debt, such as a mortgage or a car loan, you will have the option of keeping the collateral and “reaffirming” the debt or surrendering the collateral and discharging the debt.

Contrary to popular belief, liquidation does not mean that all your assets will be seized by the Court.  Both federal and state law contain certain exemptions – property that is exempt from seizure by the bankruptcy court or your creditors.  If you are worried about losing your home or your car, rest assured that these items are exempt and, provided you can pay the mortgage or the car loan, you will most likely get to keep them.

If you are having difficulty paying your debts you should talk to a bankruptcy attorney sooner rather than later – certainly before you start liquidating assets.  Sadly, people often liquidate exempt assets in an attempt to avoid bankruptcy.  Then, when they are still unable to pay all of their debts, have to go through bankruptcy anyway.   A good bankruptcy attorney can help you avoid this by protecting exempt assets.

Not everyone is eligible for Chapter 7. To qualify for Chapter 7, a debtor must pass the“means test”.  In other words, your income must be below a certain amount, based on your area of residence and your family size.  Further, not all debts are dischargeable.  Back taxes, property taxes, student loans and domestic support obligations are, with a few exceptions, not dischargeable.  However, some debtors who have these types of debts find that getting out from under their dischargeable debts makes dealing with the remaining debts more manageable.

 Chapter 13 – Reorganization

Chapter 13 requires that you have some disposable income that you can use to partially settle some of your debt.  The amount that must be committed to debt settlement is determined by subtracting your reasonable and necessary living expenses from your income.  The resulting amount, called your “disposable monthly income”, is paid to the Trustee to be divided up among your creditors.  Your repayment plan will last 3 to 5 years.  At the end of the repayment plan, any unpaid portion of your unsecured debts is discharged.  Secured debts, with the exception of home mortgages, are generally paid in full during the term of the repayment plan, generally leaving the debtor debt free at the termination of the Chapter 13 case.

The court does not seize assets in a Chapter 13 case.  So if you have non-exempt assets that you wish to keep, Chapter 13 is a good option.

Which Chapter Should You File?

There are many factors to consider.  The most obvious consideration is whether or not you qualify, based on your income, to file Chapter 7. There are some situations in which a debtor who qualifies for a Chapter 7 would fare better by choosing Chapter 13 instead – such as when a home is at risk of foreclosure, a car may be repossessed or you have non-exempt assets you want to keep.  Also, if you want to keep an item, but are behind on the attach loan, Chapter 13 can be a good option.  Chapter 7 requires secured debt be brought and kept current under the original terms of the loan if the debtor wishes to keep the collateral.   Chapter 13, however, allows a debtor to repay loan arrearages as part of the Chapter 13 plan and possibly even change the terms of the loan. Consultation with a qualified Bankruptcy attorney will help you make the right choice.

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