Difference Between Chapter 7 and Chapter 13 Bankruptcies

Filing for bankruptcy is a significant decision that can offer a fresh start for those overwhelmed by debt. In California, individuals have the option to file under Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code. So, what is the difference between Chapter 7 and Chapter 13 bankruptcies in California? Each chapter addresses different financial situations, and each has its unique benefits and drawbacks. This blog post will delve into the distinctions between chapters, helping you determine which might be the right option for your financial circumstances.

Chapter 7 Bankruptcy: Liquidation Bankruptcy
Chapter 7 bankruptcy, often referred to as “liquidation bankruptcy,” is designed for individuals who have limited income and cannot pay back their debts. Here is a look at what Chapter 7 entails:

Eligibility Requirements
To qualify for Chapter 7 bankruptcy in California, you must pass the means test, which compares your income to the median income for a household of your size and in your state. If your income is below the median, you should automatically qualify. If it is above, you must complete a more detailed analysis of your income and expenses to determine eligibility.

Process and Timeline
The Chapter 7 process typically takes about four to six months from filing to discharge. Below is a brief overview of the steps involved:

1. Filing the Petition: To start the process requires the submission of a bankruptcy petition along with schedules of your current assets, liabilities, income, and expenses.

2. Automatic Stay: Once the petition is filed, an automatic stay is issued, halting most collection activities.

3. Trustee Appointment: A bankruptcy trustee is appointed to review your case and manage the sale of non-exempt assets.

4. 341 Meeting: This is a meeting of your creditors, where the trustee and creditors can ask questions about your financial situation.

5. Asset Liquidation: The trustee sells any non-exempt assets to repay creditors.

6. Debt Discharge: Most remaining unsecured debts are discharged, relieving you from the repayment of your obligations.

Benefits

• Quick Resolution: The process is relatively fast, typically concluding within 4 to six months.
• Debt Relief: Most unsecured debts, such as credit card debt and medical bills, are discharged.
• Immediate Relief: The automatic stay provides immediate relief from creditor harassment and collection actions.

Drawbacks

• Asset Loss: Non-exempt assets may be sold to repay creditors.
• Credit Impact: Chapter 7 remains on your credit report for ten years, impacting your credit score.
• Not Applicable for All Debts: Certain debts, such as student loans, child support, and recent tax obligations, are not dischargeable.

Chapter 13 Bankruptcy: Reorganization Bankruptcy

Chapter 13 bankruptcy, known as “reorganization bankruptcy,” is designed for individuals with regular income who can pay back some of their debts over time. Here are the basics regarding Chapter 13 bankruptcies:

Eligibility Requirements
To qualify for Chapter 13, you must have a regular income and your secured and unsecured debts must fall within limits as set forth within the Bankruptcy Code. As of 2024, the limits are approximately $2.75 million in secured debt and $465,275 in unsecured debt.

Process and Timeline
The Chapter 13 process is more complex and lengthier than Chapter 7, typically taking three to five years to complete. Here are the key steps:

1. Filing the Petition: A bankruptcy petition including a proposed repayment plan is required to start the process.

2. Automatic Stay: Filing triggers an automatic stay, halting most collection actions.

3. Trustee Appointment: A bankruptcy trustee is appointed to oversee your case.

4. 341 Meeting: As part of the process, you will attend a meeting of creditors where the trustee and creditors can ask questions.

5. Repayment Plan Confirmation: The court must approve your repayment plan.

6. Plan Payments: Upon approval of the repayment plan, you will be required to make regular payments to the trustee, who then distributes those funds to your creditors.

7. Debt Discharge: Upon successful completion of the plan, remaining unsecured debts may be discharged.

Benefits

• Asset Protection: In most circumstances your property, including your home and car, will remain with you, as long as you comply with the repayment plan.
• Debt Management: Chapter 13 allows you to catch up on missed mortgage or car payments.
• Credit Impact: Chapter 13 remains on your credit report for seven years, as compared to ten years under a Chapter 7 bankruptcy.

 Drawbacks

• Long Commitment: The repayment plan lasts three to five years, requiring consistent income and budget management.
• Repayment Obligation: You must repay a portion of your debts, which can be challenging if your financial situation changes.
• Complex Process: The process is more complicated and requires detailed planning and court approval.

Key Differences between Chapter 7 and Chapter 13 Bankruptcies

• Income Requirements: Chapter 7 is for those with little to no disposable income, while Chapter 13 requires a regular income.
• Debt Limits: Chapter 13 has debt limits for eligibility, whereas Chapter 7 does not.
• Asset Treatment: Chapter 7 may involve the liquidation of non-exempt assets, while Chapter 13 allows you to keep your property as long as you adhere to the repayment plan.
• Duration: Chapter 7 is quicker, typically concluding in a 4 to 6 months, whereas Chapter 13 involves a three to five-year repayment plan.
• Credit Impact: Chapter 7 stays on your credit report for ten years, while Chapter 13 remains for seven years.

Conclusion

Choosing between Chapter 7 and Chapter 13 bankruptcy in California depends on your financial situation, income, and long-term goals. Chapter 7 offers a quicker path to debt relief but may involve losing assets. Chapter 13 provides a structured repayment plan, allowing you to keep your property but requiring a longer commitment.

It is advisable to consult with a bankruptcy attorney to help navigate the numerous options and requirements in filing for bankruptcy protection.  The qualified and experienced bankruptcy attorneys at RJS LAW are available for a no cost consultation to discuss and determine the best course of action for your financial future.  Take control of your financial issues today by calling RJS Law at 619-595-1655 or by contacting us on the Web.

Written by Marco Torres, Esq.