What Is The Difference Between Chapter 7 And Chapter 13 Bankruptcy?

An excerpt from Bankruptcy: A New Beginning by Seth Hanson

Chapter 7 bankruptcy is the most common type of bankruptcy. It is what most people think of when they hear the word bankruptcy. A Chapter 7 bankruptcy typically lasts about three and a half months. A Chapter 7 bankruptcy does not require any repayment of debts, but this bankruptcy can only be used by people whose income so low that they cannot afford to repay any of their general unsecured debt. In a Chapter 7 bankruptcy there is also the possibility that some of your property will be liquidated to repay your unsecured creditors. In that situation the bankruptcy trustee performs the liquidation of the assets and then disperses the sales proceeds on a pro rata basis to every creditor that has filed a proof of claim with the court.

A Chapter 13 bankruptcy involves a plan of reorganization and usually involves the repayment of some percentage of the general unsecured debts. The percentage amount that must be repaid usually depends on an analysis of your income and expenses— your disposable income. One way to think of a Chapter 13 bankruptcy is that you will repay as much debt as you can afford to and then the remainder of the unsecured
debt will be wiped out.

In Chapter 13 bankruptcy certain debts must be repaid in full. The debts that must be paid in full through your Chapter 13 case include priority tax debt (i.e., tax debt that is too new to be wiped out), child and spousal support arrears, and secured loans where you want to keep the collateral securing the loan.

The Chapter 13 bankruptcy discharge is broader in scope than a Chapter 7 bankruptcy discharge. For example, debts stemming from a payment imposed in family law court that is not a domestic support obligation can be discharged in a Chapter 13 bankruptcy.

If in your divorce proceeding the judge said you have to pay some of your ex spouse’s debts, then that judicially created, non-contractual obligation can likely be discharged in a Chapter 13 bankruptcy. Most people who qualify for a Chapter 7 bankruptcy choose to file under that chapter. There are a few exceptions, however. One exception would be where someone has been divorced and wants to discharge the non-domestic support obligations to the ex-spouse that were imposed in the family law proceedings.

Another example where someone might choose to file Chapter 13, even though they qualify for Chapter 7, is if they want to reorganize their car loan, effectively refinancing their car loan to get a lower rate or a better a lower monthly payment and a lower interest rate.

A Chapter 13 bankruptcy also allows a debtor to “cramdown” a car loan and only pay back the retail value of the car. But this only works where the car loan is more than two and a half years old. Chapter 13 might also be preferable to a Chapter 7 where it is fairly certain that a Chapter 7 trustee will try to liquidate an asset you want to keep. In those situations, you can file Chapter 13 as an alternative to liquidation—there is no liquidation in a Chapter 13 bankruptcy—and pay for the value of the non-exempt asset over the course of the Chapter 13 plan.

Another reason someone made choose to file Chapter 13 instead of Chapter 7 is to repay priority tax debt over a 5-year period. This is an especially effective tool where the IRS is threatening to garnish or seize assets.

For more information on what chapter of bankruptcy would best suit your situation, contact your Yuba City bankruptcy attorney.