Chapter 7 and Chapter 13 bankruptcy are the two most commonly filed types of bankruptcy. If you don’t know the difference between Chapter 7 bankruptcy and Chapter 13 bankruptcy, do not despair, most people don’t. This blog will provide some of the differences between the two types of bankruptcy cases. They are so named because the primary laws that regulate them are found in Chapter 7 and Chapter 13 respectively of Title 11, otherwise known as the Bankruptcy Code.
Prospective bankruptcy case filers must meet eligibility requirements to file a Chapter bankruptcy case. If you don’t qualify for Chapter 7, you may file a Chapter 13 bankruptcy case as an option. The primary limitation here is that federal law sets specific limits on the amount of debt you may reorganize in a Chapter 13 bankruptcy case. The debts limits are $419,275 for unsecured debts and $1,257,850 for secured debts. These limits will remain in effect for 2021 but likely change for 2022.
The main difference in eligibility is based on income. There are two ways to qualify to file a Chapter 7 bankruptcy case. First, you have below-median level income for the state of Utah. This considers the size of your household. Second, if your income is not below the Utah median, you may make certain deductions from your income to try to reduce it to a qualifying level.
This calculation is known as the Means test. Its purpose is to determine whether you may reasonably be expected to repay your debts with the income that remains after you pay essential living expenses – your disposable income.
One unique difference between Chapter 7 and Chapter 13 cases is how some personal property debts are treated under the Bankruptcy Code. This can have a significant effect on a car loan. A debt secured by collateral may be reduced in Chapter 13 with a “cramdown,” in which you pay the value of the property rather than the balance of the loan. Motor vehicles depreciate substantially after purchase, so this usually results in considerable savings on your motor vehicle loan.
A cramdown is not an option in a Chapter 7 bankruptcy case. You can discharge the car loan, a secured debt if you surrender the property. Your options include reaffirming the car loan, which means keeping the terms of the loan in place after you receive your bankruptcy discharge. This means that your car loan will not be affected by bankruptcy. You may also redeem the loan by paying the holder of the lien the amount of its allowed claim.
Another interesting difference is Chapter 13 bankruptcy, also known as a reorganization, allows you to create your repayment plan with certain restrictions to repay all or part of your debts over three to five years. Chapter 13 filers make monthly payments to a Chapter 13 court-appointed trustee who distributes these plan proceeds to your creditors. At the end of this three-to-five-year plan period, the remaining unpaid debts are discharged.
In contrast, Chapter 7 bankruptcy does not require filers to make any payments on their debts but does require nonexempt assets to be liquidated or sold. The proceeds are then distributed to creditors. Chapter 7 is an effective tool for gaining a fresh start financially as you can eliminate most of your unsecured debts such as credit cards, medical bills, and personal loans.
If you have debts such as unpaid income taxes, domestic support obligations, or student loans – nondischargeable debts – Chapter 13 is probably the better option in many circumstances. The experienced attorneys at the Morrison Law Group can help you determine which option – Chapter 7 or Chapter 13 – is right for you.
Many people file Chapter 7 bankruptcy cases without a lawyer. Since the Bankruptcy Code may not be easy or straightforward, a seasoned bankruptcy attorney may still make a difference in your case. Nevertheless, it is possible to successfully file a Chapter 7 case pro se – on your own without an attorney.
But Chapter 13 bankruptcy cases filed pro se usually get a different result. Almost all Chapter 13 bankruptcy cases filed without a lawyer fail. Deciphering what the Bankruptcy Code requires to get a Chapter 13 plan confirmed, as well as understanding the complete Chapter 13 process, is more than challenging to any layperson. Title 11, Chapter 13, can be challenging for attorneys as well.
Keep in mind that Chapter 7 does require you to pay your legal fees in full before the case is filed. Chapter 13 allows you to file your case and pay your legal fees through the 3-5 year repayment plan.
The Morrison Law Group’s website contains everything you need to help anyone file a Chapter 7 or Chapter 13 bankruptcy case. The Morrison Law Group is open from 8:00 a.m. to 5:00 p.m. Monday through Friday. Our attorneys and staff are standing by and ready to help any Utah resident file a bankruptcy case from the comfort and safety of their home. Each of our locations in Ogden, Logan, Sandy, Orem, and St. George are set up so you can do everything from home. Call 801.456.9933 today to schedule a free consultation. We are Utah’s only statewide bankruptcy law firm and serve the residents of the counties of Weber, Cache, Salt Lake, Utah, Morgan, Davis, Washington, and surrounding areas.