Chapter 7: A Chapter 7 is like a deal you strike with the federal government – under that deal you agree to limit the assets you can own on the day the bankruptcy is filed. The assets you can own are actually listed in the law. These are referred to as “exempt assets” or “exemptions” because they are exempt from seizure for the purpose of paying debt, not even the federal government can take them from you. On the other side of the coin, if you own assets that are not on the list, they are referred to as “non-exempt” assets and in a Chapter 7 case non-exempt assets are taken from you, liquidated, and the proceeds distributed to your unsecured creditors in a pecking order described in the law and it is the unpaid portion of your unsecured debts that are forgiven or “discharged.” In most chapter 7 cases, the Debtor does not lose any assets.
Chapter 13: Unlike a Chapter 7 which takes about four months to complete and in which you make no payment to your unsecured creditors, a Chapter 13 contemplates you making monthly payments to the court for anywhere between 36 to 60 months depending on several factors. The amount you pay is usually known before the case is filed. If you make all of the monthly payments, then the court forgives, or “discharges” the unpaid balance of your unsecured debt. The Court must approve your repayment plan and your budget. A trustee is appointed and will collect the payments from you, pay your creditors, and make sure you live up to the terms of your plan.
There are generally four reasons debtors file a chapter 13 rather than choose a Chapter 7:
- They fail the “means test” which is a complex financial calculation which determines how much gross income you can have in the last six months and still qualify for a Chapter 7. Failing the means test generally means no Chapter 7 is available to you.
- They have “net disposable income” after paying all of their normal monthly living (and business) expenses; i.e. they demonstrate an ability to pay their creditors something.
- They are trying to protect assets. A Chapter 13 protects assets in several ways: first, there is no loss of “non-exempt” assets as there is in a Chapter 7, so if you were going to lose your boat in a Chapter 7 but wanted to keep it, you can file a Chapter 13 and keep the boat (there are other ramifications however;) secondly you can “Strip” liens off of secured property under certain conditions. During the recent recession many debtors used Chapter 13 to get rid of second mortgages on their homes.
- They have a desire to pay back at least some of their debt.
Remember that these comments are general in nature, Every case is different, and bankruptcy can be complex. To see what bankruptcy can do for you, you should speak with a knowledgeable bankruptcy attorney. You can call us at (530) 823-5310 for a FREE consultation with a lawyer.
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