“Should I file a Chapter 7 or a Chapter 13 bankruptcy?” This is a question that I discuss in every bankruptcy consultation. Chapter 7 and Chapter 13 are the two most common types of bankruptcy that individuals file.
Chapter 7 is known as liquidation and is a relatively short process. In a Chapter 7, a trustee is appointed to examine the debtor’s assets to see if there are any non-exempt assets that can be liquidated to pay creditors. Approximately 95% of Chapter 7 filings are what we call “no asset” cases, i.e., there are no assets other than exempt assets. Exemptions are determined on a state-by-state basis.
To qualify to file a Chapter 7 bankruptcy case, a debtor cannot have significant “disposable income.” Disposable income essentially means money left over each month after necessary expenses are paid. Calculating whether a debtor has disposable income is a rather complicated process and the law changes frequently in this area. If there is significant disposable income, it is unlikely that a debtor would qualify for Chapter 7, but the debtor will likely qualify for Chapter 13.
Chapter 13 is a payment plan. It doesn’t mean that a debtor has to repay all of the debtor’s debt, just as much as the debtor can afford. In addition, secured loans (such as a car loan or furniture loan) can be modified in Chapter 13. For example, a car loan with a 20% interest rate and $20,000 balance on a car with a $15,000 value, can be reduced to a claim of $15,000 with a 6% interest rate over 5 years. This can result in a significant savings.
In addition, arrearages on a home loan can be caught up over a five year period, and if there is no value to support a junior deed of trust, that junior deed of trust can be treated as unsecured. If the debtor is paying 0% or a small percentage to unsecured creditors, this could be a significant advantage.
There are many other nuances between Chapter 13 and Chapter 7. To fully explore all of your options, you should consult with an experienced bankruptcy attorney.