Chapter 7 and Chapter 13
Sept. 25, 2015
Sometimes it’s obvious which of the two consumer bankruptcy solutions is right for you. But not always. You might be surprised.
7 vs. 13
The two main kinds of consumer bankruptcy are extremely different.
Chapter 7 “straight bankruptcy” usually lasts no more than 3 or 4 months. Chapter 13 “adjustment of debts” is seldom completed in less than 3 years and can last as long as 5 years.
Chapter 7 focuses on the discharge of debts while Chapter 13 on the payment of (special) debts.
Both have trustees involved but in Chapter 7 he or she is a liquidating agent (although usually with nothing to liquidate), while in Chapter 13 he or she is mostly a payment disbursing agent.
Most Chapter 7s don’t have court hearings, nor do they directly involve the assigned bankruptcy judge except behind the scenes and for very specific functions. Chapter 13s generally have at least one court hearing for approval of the payment plan, and sometimes have multiple hearings over the course of a case, although most of the time you don’t need to attend them.
And maybe most importantly, Chapter 7s focus mostly on one moment in time—when your case is filed—while Chapter 13s look at the entire span of years that the payment plan is in effect.
As a result, under Chapter 7 debts are discharged or not, assets are protected or not, and collateral is kept or surrendered. Chapter 13 is much more fluid—debts that can’t be discharged can be handled in many creative and powerful ways, assets that otherwise would be lost can usually be protected, and collateral that would otherwise be taken by the creditor can often be saved or sometimes sold years later.
Obvious or Not?
With such stark differences between these two ways of handling debts, you’d think that picking between them would be easy. Indeed much of the time it is.
You may not lose any assets because they’re all protected through exemptions, most or all of the debts will be discharged, the collateral on secured debts are either “reaffirmed” or surrendered, and the disposable income is not too high for the “means test,”, so everything for you points in favor of Chapter 7.
Or else the opposite is true for you. Some crucial asset is not exempt so it needs further protection, significant debts would not be discharged and need to be paid over time while you are protected from the creditors, a vehicle loan needs to be “crammed down” or a second mortgage needs to be “stripped” from the your home’s title or an income tax lien needs to be valued so that you can pay the tax a minimal amount and have the tax lien released, and/or the disposable income is too high to pass the “means test,” so everything for you points in favor of Chapter 13.
But the stars certainly do not always all align on one side or the other. It can often be a mixed bag.
What if most everything point towards a Chapter 7 case, but you could save hundreds of dollars a month and many tens of thousands of dollars over time with a second mortgage “strip,” which can only be done under Chapter 13? There are numerous possibilities like this.
So even if you went to meet with an attorney thinking you’d file a Chapter 7 simple bankruptcy, it would be wise to keep an open mind in case you learned that you would not qualify for Chapter 7 or that it came with disadvantages, and/or that Chapter 13 gave you big advantages you hadn’t known about.
So to help you understand what these two procedures can do for you, our next several blog posts will look at different financial problems and how they could be solved (or not solved) under Chapter 7 and under Chapter 13.
We’ll start first with problems about things you own—assets; how Chapter 7 and 13 enable you to keep what you want, and let go of what you don’t want or can’t have.
Then we’ll get into the heart of the matter—debts. How these two procedures handle various kinds of debts, common debts and special ones like various kinds of taxes, child and spousal support, debts voluntarily secured by collateral, and those involuntarily secured through judgment and tax liens and such.
We’ll finish with problems involving your income and expenses, including how to qualify for each of these procedures, as well as other aspects important for rounding out this comparison between the two.
Please join us on this ride for the next few weeks.