Discovering the Differences Between Chapter 7 v Chapter 13 Bankruptcy
Bankruptcy is a legal remedy designed to provide debt relief to individuals or businesses who are unable to repay their outstanding debts. The goal of both Chapter 7 and Chapter 13 bankruptcy is to give the debtor a financial fresh start. How each chapter gets the debtor there, however, is different. It’s important to what’s the difference between chapter 7 v chapter 13 bankruptcy, how each generally works, and the differences between them so that you can make the best choice for you when declaring bankruptcy.
Overview of Bankruptcy
At its core, a bankruptcy filing provides debt relief. Also, bankruptcy is a major forum that provides an organized way for the debtor and their creditors to navigate claims with structure and procedure. Debtors get the comfort of not being surprised by any court cases or enforcement activity, and creditors get the benefit of knowing that they will get equal treatment to other similar creditors.
Whether an individual or business decides to file chapter 7 or chapter 13, one of the first things that happens is the automatic stay. The automatic stay prohibits creditors from attempting to collect or otherwise enforce a claim. This immediate relief is provided for in the Bankruptcy Code.
Many people file for bankruptcy to get the benefit of this automatic stay, often to stop a wage garnishment, a foreclosure, or some other enforcement of a claim. If a creditor violates the automatic stay, they may be subject to penalties or sanctions issued by the bankruptcy court. Unless you don’t qualify or there is an order limiting the automatic stay, this goes into effect immediately upon the filing of a bankruptcy petition.
The ultimate goal of the case is getting your debts discharged in bankruptcy. A discharge of debts doesn’t mean that the debts are wiped away from existence, but rather extends the automatic stay permanently. What this means is that the creditor is permanently prohibited from attempting to collect or otherwise enforce the claim. As a result, you don’t have to pay your debt, and the creditor is unable to take any legal action, such as a lawsuit, to collect or enforce that claim. (Keep in mind that the Bankruptcy Code does list non-dischargeable debt, which means creditors holding those claims can collect and enforce those debts after a bankruptcy.)
As you can see, both chapter 7 and 13 bankruptcy offer a way for debtors to obtain relief from their creditors, but they operate in vastly different ways, catering to different financial situations and objectives.
How Chapter 7 Bankruptcy Works
Chapter 7 bankruptcy is known as liquidation bankruptcy. A chapter 7 bankruptcy works with a bankruptcy trustee, who is appointed in every chapter 7 case, selling a debtor’s nonexempt property, and the distributing the proceeds of the sale of those nonexempt to creditors. It is best suited for individuals with limited income and limited property who are unable to repay their debts, providing them with a fresh start by discharging most types of unsecured debt, including credit cards and medical bills. If a debtor does qualify for chapter 7, and all of their assets are exempt, then presumably all of their debt is discharged at the end of the case without having to make any payments towards those debts.
How Chapter 13 Bankruptcy Works
In contrast, Chapter 13 bankruptcy, also referred to as repayment bankruptcy, allows debtors to create a repayment plan that spans three or five years to repay all or a portion of their debts. This form of bankruptcy is ideal for individuals with regular income who want to retain their assets and repay their debts over time through a chapter 13 repayment plan. At the end of the case, after successfully completing the bankruptcy repayment plan, any debts not paid are discharged.
People will often file a chapter 13 bankruptcy instead of a chapter 7 case if they make too much money to file a chapter 7. Another major reason people will often use chapter 13 instead of chapter 7 is that they own assets that they want to keep but that they cannot protect with bankruptcy exemptions, such as a house or a car. Another popular reason why many people file a chapter 13 case is that filing chapter 13 can stop a foreclosure, and provides a lot more flexibility that a chapter 7 case would.
The Difference Between Chapter 7 and 13 Bankruptcy
While the goal of every bankruptcy is to help a debtor achieve a financial fresh start, how each chapter gets a debtor there is different. These differences exist in the documents required for each type of case, payments, and other procedural elements. We’ll look at some of these differences below.
Filing for Bankruptcy
The filing of any bankruptcy case starts with the filing of the petition, schedules, and filing fee with the bankruptcy court. Each type of bankruptcy case has its unique filing requirements and procedures that debtors need to comply with to in order to commence the bankruptcy process.
Process of Filing Chapter 7 Bankruptcy
Every chapter 7 case starts upon the filing of a voluntary petition with the bankruptcy court. In addition to the voluntary petition, you will also need to file schedules disclosing all of your assets, income, and liabilities; a statement of financial affairs which is a deep dive into your financial history; a statement of current monthly income (known as the chapter 7 means test) to determine whether the individual’s income allows them to qualify for a chapter 7; a list of creditors; and a certificate of credit counseling. Each bankruptcy court may have additional forms required under local bankruptcy rules, so be sure to check with your court if additional documents are required.
At the time the petition is filed, the court fees are also due. Currently, the bankruptcy filing fee for a chapter 7 case is $338.00. At the time the case is filed, you can make an application to either have the filing fees waived, or to pay them in an installment plan.
In about 30 days after the chapter 7 is filed, the debtor will have to appear for a meeting of creditors. During this hearing, the bankruptcy trustee assigned to the case will ask the debtor questions about their filing, and about their financial history. Generally, bankruptcy trustees are looking to find out whether (1) the debtor owns any assets that are not exempt that they can recover to sell and pay unsecured creditors; and (2) whether the debtor is committing some kind of fraud.
If the trustee is satisfied that there are no issues about non-exempt assets or fraud, the trustee will generally close the meeting of creditors, and that would be the only time a debtor needs to appear for a hearing. If, however, the trustee believes that there do exist nonexempt assets, or that there is fraud in the case, the trustee will keep the meeting of creditors open for further examination, as well as request relief from the bankruptcy judge.
Process of Filing Chapter 13 Bankruptcy
The process of filing a chapter 13 requires much the same paperwork that a chapter 7 requires. A voluntary petition is filed to start the case. Schedules detailing the debtors incomes, assets, and liabilities are required to be filed; the statement of financial affairs; the current monthly income statement/means test to determine disposable income; a list of creditors; and a certificate of credit counseling. Chapter 7 and chapter 13 differ, however, in that in a chapter 13, the debtor is required to prepare and file a repayment plan which proposes to repay some or all of the debt over 3 or 5 years.
Similar to the chapter 7 case, at the time the chapter 13 case is filed, the current filing fee of $313.00 is due. And similar to the chapter 7 filing fee, a debtor can make an application to pay the chapter 13 filing fee in installments.
In about 30 days after the chapter 13 case is filed, a meeting of creditors is scheduled. Similar to the chapter 7 case, a bankruptcy trustee is assigned to review the case and confirm whether (1) the plan meets the statutory requirements; and (2) the debtor has the ability to successfully complete the plan. In many jurisdictions, the chapter 13 trustee will advise the debtor of additional documents or changes to documents they need to make the plan comply with the bankruptcy code. Additionally, the debtor has to make the proposed plan payments to the trustee within 30 days of the filing date.
If a chapter 13 plan meets all requirements, then a hearing is held to confirm the plan. If granted, the debtor just needs to make all of the monthly payments proposed under the plan. If the plan isn’t ready for confirmation, the hearing may be adjourned for a short period for the debtor to adjust and correct the plan.
Debt Repayment and Discharge
Debt Repayment in Chapter 7 and Chapter 13 Differ
As mentioned previously, in a chapter 7 case, payments are made to creditors if and only if there are nonexempt assets that can be liquidated. If all of a debtor’s assets are exempt in a chapter 7 case, then the creditors don’t get paid, and the debt is discharged. As it concerns secured property, if the debtor wants to keep the property, they must continue to make the regular payments as they come due (such as payments on auto loans to keep a car).
The premise of a Chapter 13 bankruptcy, however, is that the debtor pays back some percentage of their debt under a court-approved repayment plan over 3 or 5 years. Under the chapter 13 plan, all types of debts have to be addressed, and similar classes of creditors have to be treated the same. For instance, the plan cannot provide that one credit card will be paid back 100% of the claim, while another credit card will be paid back 10% of its claim.
Additionally, any regularly scheduled monthly payment on secured debts, such as a mortgage payment or car payment, have to continue to be made under the chapter 13 case (if the debtor wants to keep that property). For instance, if a debtor owns a home, the debtor has to demonstrate the ability to continue making the regular monthly payments, and in fact make those payments, during the pendency of the case. What this means is that, to qualify for chapter 13, the debtor has to show his or her ability to make all regular monthly payments, plus the plan payment.
Once the repayment plan is successfully completed, the bankruptcy discharge order is entered. For instance, let’s say you file a chapter 13 case where there was $100,000 in credit card debt. The confirmed plan provided that general unsecured creditors (like credit cards, medical debt, personal loans) would be paid 20%. That means, by the end of the chapter 13 case, you would have repaid your credit cards $20,000, and the balance of $80,000 gets discharged.
Benefits and Drawbacks of Chapter 7 and Chapter 13 Bankruptcy
Because of how differently each chapter operates, individuals must weigh the benefits and drawbacks of Chapter 7 and Chapter 13 bankruptcy to determine the most suitable choice for their financial circumstances.
Benefits of Chapter 7 Bankruptcy
One of the main benefits of filing Chapter 7 vs chapter 13 is that chapter 7 offers a relatively quick process, typically taking about four months from the time the case is filed until the time the discharge order is entered. Another incredible benefit of a chapter 7 bankruptcy (sometimes referred to as a “straight bankruptcy”), is that, if you qualify and all your assets are exempt, then you don’t have to pay back creditors anything.
Another benefit of using bankruptcy chapter 7 is that, even when factoring the costs for attorney’s fees and the filing fees, it’s generally the most speedy and cost-effective way to get rid of debt.
Drawbacks of a Chapter 7 Bankruptcy Filing
After looking at the benefits of chapter 7, many people may wonder whether there are any drawbacks to a chapter 7. One drawback is that there is no right to voluntarily dismiss a chapter 7 case. Once you file, you’re stuck with the case. This can often lead to challenges if a chapter 7 was filed as an emergency, and the debtor has nonexempt assets that they forgot to consider. The trustee may go after the debtor (or transferees of the debtor) to recover property.
Another drawback of filing a chapter 7 case is that you are not entitled to obtain another discharge for 8 years, which is one of the longer waiting periods in the bankruptcy code to obtain another discharge.
A drawback that exists no matter which type of bankruptcy is filed is that the bankruptcy is reported on your credit report for up to 10 years. While the impact of your credit report will be different depending on the purpose, it is still something that you may want to consider when filing, as well as how to build credit after bankruptcy.
Benefits of Chapter 13 Bankruptcy
On the other hand, Chapter 13 bankruptcy enables debtors to retain their assets and develop a structured repayment plan to gradually repay their debts over a period of three to five years. Chapter 13 is more flexible than a chapter 7 case, providing debtors with a way to keep all of their property, as well as deal with all of their creditors in a single forum.
One of the most common reasons people file is that a chapter 13 can stop the foreclosure sale of a home. In addition to stopping a foreclosure sale, chapter 13 allows a debtor to propose a way to catch up with arrears and keep their current mortgage, allowing the debtor to remain in the home. If a debtor makes too much money to qualify for chapter 7, or has nonexempt assets they would lose, but want to stop a foreclosure of a house, they would need to file a chapter 13 to stop the sale while also preserving their nonexempt assets.
Another benefit of using chapter 13 would be that the debtor does have a right to voluntary dismissal. This means that if it doesn’t look like the debtor can create a confirmable plan, or otherwise proceed with the case, they can file a motion and the bankruptcy case could be dismissed.
Drawbacks of a Chapter 13 Bankruptcy Filing
One of the biggest drawbacks of a Chapter 13 bankruptcy is the sheer length of time of a case. Unlike chapter 7 cases, which are typically over and done with in about 4 months, a chapter 13 bankruptcy typically keeps the debtor under court supervision for years. This can be challenging later on as circumstances change. For instance, if something happens and you need to buy a new car, you would likely have to file a motion in court to get approval to buy a car.
Another drawback of chapter 13 is that there are debt limits. A debtor may not be able to file a chapter 13 if the amount of debt they have surpasses the amount allowed under law, which at the time of this writing is $2,750,000. If a debtor has more debt than this amount, they may have to consider a chapter 7 or chapter 11 bankruptcy instead of chapter 13.
One final drawback of chapter 13 bankruptcy may be the requirement of regular income. To be able to proceed with a chapter 13 case, the debtor has to be able to demonstrate that they have regular income to support and successfully make plan payments. While the definition of regular income is broad and constitutes lots of different sources, the debtor still bears the burden of demonstrating that such regular income exists.
When Should I File for Chapter 7 or Chapter 13 Bankruptcy?
Deciding when to file for Chapter 7 or 13 depends on lots of different factors, such as your income, the type of debts you owe, and your financial objectives. Chapter 7 is often best suited for individuals with limited income, have predominantly assets that are exempt, and who are unable to repay their debts after paying their regular monthly necessary expenses.
On the other hand, Chapter 13 bankruptcy is ideal for individuals with regular income who want to retain their assets and have the ability to repay their debts over time through a court-approved repayment plan.
As a very broad rule, if you qualify for chapter 7 and would not lose any property, I generally suggest aiming to file chapter 7. If you file chapter 7 and you have nonexempt assets that you want to keep, such as a car, then you generally have to pay that nonexempt dollar value in full to the trustee relatively quickly.
For almost every other circumstance, a chapter 13 is probably advisable. If you have nonexempt assets that you want to keep (again, such as a car), you can pay the nonexempt value over time under the chapter 13 plan. If you are behind on mortgage payments, a chapter 13 case allows you to repay the arrears over the plan, allowing you to keep your home (and preserve your mortgage interest rate, which may be important).
How soon can you file Chapter 13 after Chapter 7?
If you have previously filed for Chapter 7 bankruptcy, you can file for Chapter 13 bankruptcy after a specific period, but there is a waiting period if you want to be able to obtain a discharge of debt. Generally, individuals can file for Chapter 13 bankruptcy and obtain a discharge four years after filing for Chapter 7. However, this timeline may vary based on individual circumstances and the specifics of your previous bankruptcy case.
How soon can you file chapter 7 after chapter 13?
Similar to trying to file a chapter 13 after you previously filed a chapter 7 case, there may be a waiting period to qualify for a discharge in the subsequent case. If you previously filed a chapter 13 case in which you obtained a discharge, then you have to wait six years before you can file a chapter 7 and obtain a discharge in that case.
Conclusion
Bankruptcy can help many people in many different situations. As you can see, however, there are a number of different procedural requirements, as well as legal questions, that have to be well-understood and addressed to file a successful bankruptcy case. Getting these things wrong can result with your case being dismissed, property being lost, or even an order limiting your ability to file future bankruptcies.
Do you need a bankruptcy attorney to file chapter 7 or chapter 13?
As with any kind of legal proceeding, you have the right to file your own case without an attorney. Given the complexities of the bankruptcy laws, each court’s procedures, as well as the practice of the trustees, it is highly recommended to consult and work with an experienced bankruptcy attorney that you are comfortable with. A bankruptcy attorney’s experience and knowledge can provide valuable guidance, from walking you through bankruptcy and non-bankruptcy options to mapping out how a bankruptcy under each chapter would look like. Importantly, a bankruptcy lawyer will assist in ensuring that all necessary documentation is complete and accurate to avoid any issues of cases being dismissed or missing other critical deadlines.
At the Law Office of Richard Kistnen, we take great pride in helping people thoroughly understand how a bankruptcy case would work for them. We provide candid and transparent analysis, along with reasonable attorney fees. If you want to get out from under debt, or if you’re facing some kind of collection activity, such as wage garnishment, foreclosure or a collection lawsuit, speaking with a bankruptcy lawyer as early in the process as you can will be most helpful. Don’t put it off any longer, contact the Law Office of Richard Kistnen today to discuss your bankruptcy questions by calling (718) 738-2324, or book your confidential, no obligation bankruptcy consultation right now by clicking here.