What Is The Difference Between Chapter 7 and Chapter 13 Bankruptcy?
Individuals facing the need to declare bankruptcy to recover from financial problems have choices that depend on household income, assets, and the kind of debt they have. The U.S. Bankruptcy Code provides two primary approaches to bankruptcy for individuals in Chapter 7 and Chapter 13 of the Code.
At the Sasser Law Firm, our board-certified personal bankruptcy attorneys can help you determine whether Chapter 7 or Chapter 13 bankruptcy – or another option – is appropriate to resolve your financial problems. Bankruptcy is a legal tool to help people burdened by unmanageable debt to make a fresh start. But it is not a decision to be taken lightly, either. We offer a no-obligation review of your financial situation and analysis of the options available to you.
If Chapter 7 or Chapter 13 bankruptcy is right for you, our compassionate attorneys can guide you through the process. Over the last 20 years, Sasser Law has helped more than 8,500 people and businesses in Cary, Raleigh, and other North Carolina communities start over with a clean financial slate. If you are struggling with insurmountable debts, we are here to help you.
Individual Bankruptcy: Chapter 7 vs. Chapter 13
Many clients ask, “Is it better to file a chapter 7 or chapter 13 bankruptcy?” The answer is it depends on individual circumstances.
There are many factors to consider when deciding how to approach personal bankruptcy, including;
- the amount of debt you have
- whether you have regular monthly income
- whether you have assets you want to protect
Some things you will need to consider when deciding between Chapter 7 and Chapter 13 bankruptcy:
Chapter 7 bankruptcy involves liquidation of assets. Under its provisions, the debtor sells his or her assets to raise money to pay debts. Certain property is exempted, such as a car used as a primary means of transportation. Under Chapter 7, a debtor may have certain kinds of debt discharged or dismissed, such as credit card balances and medical bills.
Chapter 13 bankruptcy is a reorganization available to individuals who have adequate, regular income to pay down debts. A Chapter 13 filing does not require selling off assets, but it does eventually allow some unsecured debt to be discharged. Under Chapter 13, the person filing for bankruptcy proposes a plan to pay all or a portion of his or her debt over three to five years. The plan may include renegotiating the terms of loans to lower payments. In the end, the U.S. Bankruptcy Court approves a consolidated, monthly or bi-monthly payment, which is made to a trustee who distributes it to creditors.
Most individuals use Chapter 7 for bankruptcy. It is faster and less expensive. However, there are criteria to qualify for a Chapter 7 filing. Chapter 13 is available to individuals and self-employed individuals (sole proprietors) but not to businesses.
Your household income must be less than the median income in your state to be eligible for Chapter 7 bankruptcy. If your income is higher, a means test will determine whether you make enough to pay some of your debts. If after covering essential living costs each month you have money left that could go toward your debts, you will be required to use a Chapter 13 bankruptcy.
You cannot have more than $419,275 in unsecured debt (such as credit card debt) or more than $1,257,850 of secured debt (as of April 2019) and qualify to file for a Chapter 13 bankruptcy reorganization. With that amount of debt, you would file under Chapter 7.
Advantages and Disadvantages of Chapter 7 and Chapter 13 Bankruptcy
Everyone’s situation is unique. An advantage for you may be less important or a disadvantage to someone else. That’s why a bankruptcy lawyer at Sasser Law will sit down with you to get a full understanding of your financial situation as well as your goals before making recommendations to you.
What’s important to you?
- Keeping your property. Chapter 13 allows you to keep your property, which is one of the advantages of Chapter 13 bankruptcy. Chapter 7 requires selling much of what you own. However, certain property, such as your home, car, clothing, or major appliances may be exempt from liquidation if you meet certain income requirements.
- Keeping your car. If you owe money on a car loan, under Chapter 7 you must either demonstrate that you can continue to make loan payments and sign a new contract to do so, or you may pay the wholesale value of the vehicle in a lump sum to pay off the loan. Under Chapter 13, the debt is consolidated with others and paid overtime.
- Stopping creditors’ calls. Both Chapter 7 and 13 bankruptcy filings protect you from creditors. As soon as you file for Chapter 7, your creditors are notified and prohibited from contacting you. Under Chapter 13, you are protected from creditor collections during the life of the repayment plan.
- Protecting co-debtors. Under Chapter 7, creditors may seek payment from co-signers on loans you have not paid. A Chapter 13 payment plan blocks creditors from contacting your co-debtors.
- Time spent on bankruptcy. A Chapter 7 bankruptcy liquidation can be completed in three to five months. A Chapter 13 reorganization takes longer. It is by design a three- to five-year plan.
- Cost of bankruptcy proceedings. There are filing and administrative fees for bankruptcy filings, and attorneys’ fees if you obtain legal help. Under Chapter 13 reorganizations, all costs are folded into the consolidated debt repayment plan. At Sasser Law, we offer an income-based fee structure for Chapter 7 bankruptcy filings.
- Paying your debt. Many people take pride in paying what they owe, despite the difficulty. Certain debts are not forgiven or discharged, in Chapter 7 or Chapter 13 bankruptcies. This includes mortgages, car loans, and student loans. Chapter 7 offers the opportunity to discharge most debt upfront, but the debtor sells assets to raise money for other creditors. Chapter 13 requires a plan to pay priority debts, but once you successfully complete the plan, any remaining nonpriority unsecured debts may be discharged.
- Rebuilding your credit. Of course, bankruptcy will have a negative impact on your credit scores. A Chapter 13 filing remains on credit reports for up to 7 years. Chapter 7 bankruptcy remains on credit reports for up to 10 years. In either case, this is time to start over and establish a stable credit history.
Our compassionate attorneys want to help you get back on your feet financially the best way we can. We will work with you to determine which bankruptcy alternative or other solution would make more sense for you.
Getting Ready to Consider Chapter 7 and Chapter 13 Bankruptcy
In your initial consultation with one of our attorneys, we will evaluate your situation to determine whether Chapter 7 or Chapter 13 is the best option for you. We will review information about your income, assets, expenses and debts.
We will help you gather a list of your creditors and the amounts owed, information about your income, a list of your property, and a detailed accounting of your monthly living expenses. The goal of an initial case assessment is to conduct a thorough review of your situation and help you plan how you will move forward.
We will handle all of the paperwork required of a bankruptcy filing, which includes preparing:
- A statement of financial affairs
- Schedules of assets and liabilities
- A schedule of current income and expenditures
- A statement of monthly net income (and anticipated increases in income or expenses)
- Evidence of income from employers received 60 days before filing
- Information about any interest you have in federal- or state qualified education or tuition accounts (e.g., 529 Plans)
- A schedule of executory contracts and unexpired leases
- Copies of tax returns or transcripts from the most recent year (and any returns filed during the case).
We will be able to determine what property should be considered protected from bankruptcy. North Carolina law provides a homestead exemption, a motor vehicle exemption, and several other personal property exemptions.
Our team can also move quickly to file a bankruptcy petition with the court, which will automatically stop creditors from contacting you while you are working your way through the bankruptcy process.
Your Sasser Law bankruptcy attorney will assist and advise you throughout the process. We will explain every step of the process ahead of time to make sure you are prepared for questions or decisions from the bankruptcy trustee or court.
If you are filing a Chapter 13 petition, we will work with you to create a proposed debt payment plan. Your attorney will accompany you to the “341 meeting,” which the trustee will hold for you and at which your creditors have an opportunity to ask questions about your bankruptcy. At this conference, you will be asked under oath about your finances and, if filing under Chapter 13, the proposed plan.
Most bankruptcy cases proceed smoothly, but sometimes disputes arise and make litigation unavoidable. If this occurs, the seasoned bankruptcy litigation team at Sasser Law Firm has extensive trial experience and the understanding of bankruptcy code required to fight for your interests all the way through appeal, if necessary.
Talk to a Knowledgeable Bankruptcy Attorney Today
At the Sasser Law Firm, you will work directly with a knowledgeable attorney to determine the best way to resolve your financial difficulties. We pride ourselves on giving straightforward and honest legal advice about personal and business bankruptcies under Chapter 7, Chapter 13, and other provisions of the Bankruptcy Code.
Don’t let a financial problem grow worse when help is available. Schedule a free consultation with our compassionate consumer bankruptcy attorneys today. The Sasser Law Firm serves individuals and businesses throughout North Carolina, including in Wake, Harnett, Johnston, Durham, Orange, Granville, Vance, Franklin, Warren, Nash, Lee, Chatham, and Moore counties.