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Chapter 7 vs. Chapter 13 Bankruptcy
Chapter 7 and Chapter 13 both provide effective relief for individuals and households experiencing severe financial debt. However, neither chapter is a “one size fits all” solution.
Chapter 7 is designed for individuals and households with limited income, assets, resources, and mostly unsecured debt. Chapter 7 could be the perfect option for a single unemployed person overwhelmed with credit card debt.
Chapter 13 is for people who have a regular income. Typically, an individual or household will use Chapter 13 to reorganize their debts. If you lost your job for a short period and fell behind on your mortgage payments, Chapter 13 could be an option to repay your mortgage lender the money you owe.
The Type of Debt Impacts the Bankruptcy Chapter
If you are contemplating filing for bankruptcy, you probably have a significant amount of debt. The type of debt you have will influence what kind of bankruptcy you should file.
In bankruptcy, your debt will be categorized in four ways: unsecured, secured, priority, and non-dischargeable.
Unsecured debt includes a broad range of debt and financial obligations. Credit card bills, medical expenses, some personal loans, and certain utility bills are considered unsecured debt. If you only have unsecured debt, you will most likely want to file a Chapter 7 case.
Secured debt is attached to property or collateral. Your mortgage or a car loan is an example of secured debt. Under some circumstances, a personal loan could be secured by your property. A utility company could also get a lien on your property if you are delinquent. If you wish to keep your secured property, you must pay the debt. A Chapter 13 case allows debtors five years to pay a delinquent secured debt. For instance, if you have fallen behind on your vehicle and believe it will be repossessed, you could file a Chapter 13 case to pay back what you are behind.
Priority debt is debt that will survive bankruptcy. For example, unpaid income tax is considered a priority debt. Therefore, if you file a Chapter 7 to eliminate credit card debt, your tax obligation will survive the discharge. On the other hand, if you file a Chapter 13 case, priority debt must be paid through the bankruptcy plan.
Non-dischargeable debt is debt that cannot be eliminated through any chapter of bankruptcy. If you owe alimony, child support, criminal restitution, certain taxes, or student loans, it cannot be eliminated through bankruptcy. However, discharging other debts could make these obligations more manageable. Even if you have a significant amount of non-dischargeable debt, you should speak with our Folsom, CA bankruptcy lawyers.
Calculate Your Household Income and Valuate Your Assets
The type of debt will inform the type of bankruptcy you will want to file. However, there are still eligibility requirements for filing a case. To file Chapter 13, you must have regular monthly income – you must be able to pay your trustee payment after deducting your monthly living expenses. If you are in foreclosure but cannot afford your mortgage payment or the monthly trustee payment, you will not be able to file a feasible Chapter 13 bankruptcy.
Income and assets become more of an issue when someone is trying to qualify for Chapter 7. Statistically, Chapter 7 is the most popular chapter of bankruptcy. This makes sense – everyone would rather discharge their debt than be required to pay it back through a Chapter 13 bankruptcy plan. However, not every debtor is eligible to file Chapter 7.
To qualify for Chapter 7, you must pass a means test. Your monthly household income must not exceed the median amount in your geographical area. If you make too much money, you must file Chapter 13. Additionally, Chapter 7 is often referred to as “liquidation” bankruptcy. This is because a court-appointed trustee could sell your personal property to pay your creditors. Fortunately, there are federal or state exemptions, depending on where you live, that protect your property. Unfortunately, these exemptions might not protect everything. This is why it is important to review your assets with our experienced California Chapter 7 bankruptcy attorneys before filing.
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