Liquidation vs extended payments
Chapter 7 bankruptcy is also known as a Liquidation Bankruptcy: the debtor’s non-exempt assets are sold.
Chapter 13 bankruptcy is an extended repayment arrangement, known as Adjustment of Debts. Both types end with a bankruptcy discharge, when the individual’s debts are wiped out and the individual is awarded with a fresh start.
Loss of assets
In Chapter 7, the debtor files for protection under the Bankruptcy Code, in which a Trustee is assigned to review the petition and lead a 341 meeting, otherwise known as a meeting of creditors. The creditors then have 90 days to object to discharge, and the Trustee must conclude whether fraud or other complications are present. The Trustee must then determine if any or all of the debtor’s assets are protected. If all of the property is protected, the Trustee will generally not issue a report of no distribution indicating that there will be no recovery of assets to the debtor. Once the 90 days have passed with no objections, the debtor will receive a Chapter 7 discharge; an official cancellation of debt. Certain property, called “exempt assets”, can be protected from seizure.
Chapter 13 bankruptcy is designed for individuals who want to pay back their debts but need an extended period of time to do so. It does not require the debtor to sell their assets. In Chapter 13 bankruptcy, the debtor makes biweekly or monthly payments to the Chapter 13 Trustee, who then makes a 100% distribution to the creditors. The amount for payback is based on how much they can afford after necessary living expenses.
No assets vs. regular income
Generally a Chapter 7 bankruptcy is filed by a person with limited or no assets. With no assets, it is a relatively simple procedure. However, if the debtor has sufficient income to re-pay at least a portion of the debts, a Wage Earner Repayment Plan under Chapter 13 may be the way to go.
Unsecured debts and completion time
In a typical Chapter 7 bankruptcy, the debtor does not pay anything to the unsecured creditors, unless the bankruptcy court requires them to liquidate non-exempt assets. A Chapter 7 bankruptcy is typically completed in a relatively short period of time, generally a number of months.
Although a Chapter 13 bankruptcy does not require selling assets, the debtor is required to repay some or all unsecured debt back through the court over a period of up to five years. The payments will be at least as much as the money creditors would receive if non-exempt assets were liquidated as part of a Chapter 7 bankruptcy. Upon the completion of the court-ordered repayment schedule, any unpaid unsecured debts are discharged.
Which bankruptcy chapter is right for me?
The correct option will depend on a number of factors, including:
- your income,
- your ability to repay your debts, and
- where you live (the rules on exempt assets vary from state to state).
Since the law is complicated, we suggest you contact a bankruptcy attorney to fully explore your options.
Since Chapter 7 bankruptcy typically involves no payments, and Chapter 13 bankruptcy involves payments for up to five years, why would anyone choose to deal with their debts through Chapter 13? There are four typical answers.
- If you have a regular income, you may not qualify to file under chapter 7. The Bankruptcy Reform Act of 2005 has imposed a Means test: if your income is too high, you cannot file for bankruptcy under Chapter 7; you must file under Chapter 13.
- If you are concerned about a foreclosure on your home, a Chapter 13 Wage Earner Plan may be a better option. Although a Chapter 7 petition delays foreclosure, it does not prevent it. In fact, the stay is temporary and expires when the discharge is entered. In a Chapter 13 bankruptcy, the person filing the Wage Earner Plan may be able to catch up in full on the mortgage arrears as part of the court approved repayment plan. Assuming the mortgage is brought up to date, the foreclosure is prevented.
- Even though Chapter 7 may be an option, you may simply not want to file for Chapter 7 bankruptcy. Since you know you borrowed the money, you may prefer to file a Chapter 13 repayment plan to deal with your debts.
- A Chapter 13 Wage Earner Plan generally allows you to retain all of your assets, so if you would lose assets in a Chapter 7 bankruptcy, Chapter 13 may be the best option for you.
Chapter 7 bankruptcy, where a debtor’s assets are liquidated, should be considered a last resort, and should only be filed if all other options have been explored and exhausted.
According to www.equifax.com, a bankruptcy can remain on your credit report for 10 years, which will impact your ability to obtain credit in the future.
Chapter 7 should be considered firmly, as it can be a rugged step, but can also be very beneficial. A bankruptcy attorney can help you determine which bankruptcy chapter would best suit your personal needs.
How can I decide my next step?
It is important that you thoroughly check other alternatives before proceeding with bankruptcy.
Most bankruptcy lawyers will give you a free consultation. They will go over your family situation, review your debts and your assets, and explain the different options. They will also explain what services they provide, and how much it will cost.
If you know you wish to pursue bankruptcy, contact a bankruptcy lawyer to guide you through the process and ensure that your solution is truly the best one for your case.