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What's the Difference Between Chapter 7 & Chapter 13 Bankruptcy?


Filing for bankruptcy can help you get a new lease on life and improve your financial station. When you file for bankruptcy as an individual, one of the first questions you'll need to answer is whether you want to file for Chapter 7 or Chapter 13 bankruptcy. Understanding the pros and cons of both types can help you make the best decisions for your future in your bankruptcy case.

At Arnold Law Group, APC, we'll work with you to ensure your rights and assets remain protected throughout your bankruptcy case.

Contact us online or via phone at (559) 900-1263 to schedule a consultation with our team.

What Is Chapter 7 Bankruptcy?

Chapter 7 bankruptcies often take 4-6 months to complete, depending on the circumstances of your case.

To successfully file for a Chapter 7 bankruptcy in California, you must first pass a means test. The means test uses your annual income to determine whether you should file for Chapter 7 or Chapter 13 bankruptcy.

If you live in a one-member household, your annual income must be less than $47,798.00 per year to file for Chapter 7 bankruptcy. The average annual income is calculated by averaging your monthly income for the last six months.

If you fail to pass the means test, Chapter 13 bankruptcy may be a better option for you (more on that later).

If you pass the means test and file for Chapter 7, you must provide the bankruptcy court with the following information:

  • All property you own;
  • All debts you possess;
  • Any property you have that is exempt from the bankruptcy process;
  • All property you owned and money you spent in the two years leading up to the bankruptcy, and;
  • All property you sold or gave away during those two years.

The court is primarily interested in your recent property to try and ensure you didn't give property away to a relative or other entity before filing for bankruptcy with the intent to claim it later. Basically, they just want to make sure everything is on the level. Filing for Chapter 7 gives you an "automatic stay," preventing creditors from trying to collect debts while the case is ongoing.

Property that is considered "essential" for you to maintain a baseline quality of life is exempt from the bankruptcy case. This often includes your place of living, your vehicle (if you have one), basic necessities such as clothing, and items that have low value but are special to you (like a family heirloom).

During a Chapter 7 bankruptcy, you'll work with a bankruptcy trustee. The trustee tries to ensure that your creditors receive as much repayment as they possibly can.

The trustee will hold a "creditors meeting," where you sit down with your creditors and the trustee. At this meeting, the creditors determine whether you have any non-exempt property they would like to claim to repay your debts. Creditors typically consider most property relatively worthless unless it has significant value (like a piece of non-exempt real estate).

Once the creditors are done claiming any property (if they wish to do so), you can finalize your bankruptcy, wiping out any remaining debts you have with a few exceptions (child support, tax debts, and student loans must still be paid). If you own collateral (such as a mortgage for your house), you will probably have to continue to pay for that as well.

What Is Chapter 13 Bankruptcy?

If you fail to pass the means test, you may need to file for Chapter 13 bankruptcy instead. In a Chapter 13 bankruptcy, you establish a repayment plan with creditors instead of selling off your property to repay debts.

To file for Chapter 13, you must have a high income that your creditors and the bankruptcy believe establishing a repayment plan will enable you to feasibly pay off your debts. You must also not have a debt burden that exceeds a certain amount.

In many ways, Chapter 13 bankruptcy is similar to Chapter 7 bankruptcy. However, instead of meeting with creditors to determine what property you can sell off to repay your debts, you instead meet with creditors to come up with a repayment plan for your various debts. As a result, your debt is not wiped out at the end of your case—you'll just have more time to pay it off, and it should be easier to do so.

After you successfully repay your debts, you must show evidence to the bankruptcy court to conclude your case.

Is Chapter 7 or Chapter 13 Bankruptcy Better for Me?

Other than the means test itself, Chapter 7 and Chapter 13 bankruptcy have a variety of differences.

You may want to consider filing for Chapter 7 bankruptcy if:

  • You want your case to resolve quickly. Chapter 7 bankruptcies usually take no more than half a year to finalize, while repayment plans for Chapter 13 bankruptcies can last a good deal longer depending on the case.
  • You want to wipe out your debts. Filing for Chapter 13 doesn't actually wipe out your debts, so if you want to eliminate them, Chapter 7 is a good choice.
  • You don't make much money or have valuable assets. The less valuable, non-exempt assets you own, the less property creditors will seize in your case. If you don't have many valuable assets and lack a sizable income, Chapter 7 bankruptcy may suit your needs perfectly.

Alternatively, Chapter 13 bankruptcies also have benefits of their own:

  • You don't have to sell off any property. Establishing a repayment plan instead of selling off property may be preferable if you own valuable assets.
  • You're confident in your ability to repay debts. If you think making a repayment plan can help you repay debts, Chapter 13 is a good option.
  • Most of your debts are owed in taxes, child support, or student loans. You can't wipe out these debts with a Chapter 7 bankruptcy, so using Chapter 13 to get a repayment plan may be a better option.

At Arnold Law Group, APC, we'll work with you to help you navigate your bankruptcy case with confidence. Contact us online or via phone at (559) 900-1263 to schedule a consultation with our team.

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