CHAPTER 7 vs. CHAPTER 13
When a potential client is considering filing for relief under the bankruptcy code, a crucial analysis you should discuss with your attorney is whether you are better suited for a Chapter 7 or a Chapter 13. These are the two most common types of bankruptcies filed across the United States of America and knowing the differences between each will help you decide which is more beneficial for your personal situation. Below you will find an explanation of some key differences between these two types of bankruptcies, Chapter 7 and Chapter 13.
Length of the Case
One of the most obvious differentiations between Chapter 7 cases and Chapter 13 cases is how long the perspective case lasts. This difference can be a major deciding factor when a client is considering one chapter over the other.
The typical no-asset Chapter 7 case is open and active for approximately 3-4 months. The basic timeline of a Chapter 7 case from the filing to the end of the case is as follows:
- Case is filed
- 521 documents are sent in to the Chapter 7 Trustee
- The Financial Management course is completed and the certificate is filed
- Debtor attends and testifies at the 341 Meeting of Creditors
- Reaffirmation agreement (if necessary) is reviewed, signed, and sent to the creditor
- Hearing on the reaffirmation agreement (if necessary) is held
- Debtor receives his or her discharge
- Debtor’s case is closed and is issued a Final Decree
On the other hand, a typical Chapter 13 case lasts anywhere from 36 to 60 months and then usually requires an additional 3 to 6 months to close. The basic timeline of a Chapter 13 case from the filing to the end of the case is as follows (keep in mind that a Chapter 13 case has many more variables than a Chapter 7 case and those are not shown below):
- Case is filed
- 521 documents are sent in to the Chapter 13 Trustee
- The Financial Management course is completed and the certificate is filed
- Debtor attends and testifies at the 341 Meeting of Creditors
- The Chapter 13 Plan is confirmed
- Debtor continues to make payments to the Chapter 13 Trustee for 36 to 60 months
- Debtor reviews and signs documents to show eligibility for receiving a discharge
- Debtor receives his or her discharge
- Debtor’s case is closed and is issued a Final Decree
Liquidation vs. Payment Plan
Another glaring difference between Chapter 7 cases and Chapter 13 cases is how they are administered. In a Chapter 7 bankruptcy, the concept is that the Trustee will look to liquidate your assets in order to pay your unsecured creditors. You are allowed to protect certain assets by using the California Code of Civil Procedure. Any assets that you protect, the Trustee is not allowed to liquidate. However, if there are any assets left un-protected, the Chapter 7 Trustee will liquidate those assets and use those funds to pay down your unsecured creditors.
However, in a Chapter 13 case, the Trustee will not be liquidating any of your assets. In this chapter, you avoid having your assets liquidated by making monthly payments to the Chapter 13 Trustee for generally 36 to 60 months. These funds are used to pay certain creditors in your case pursuant to United States Bankruptcy Code. Thus, rather than your assets being sold to pay your creditors, the concept of Chapter 13 is that you keep your assets and instead use your monthly income to make payments to the Chapter 13 Trustee.
The Bankruptcy Code allows you to file a certain motion within your case and if granted, the result would be that a junior mortgage on your home must be reconveyed (i.e. stripped off). Here is how it works: You prove to the Court that the value of your home is less than the full balance owed on your superior lien. Once the Court makes that determination, they value the secured portion of the junior lien at $0.00. Thus, once your discharge is entered, the junior lien creditor is required to file a Notice of Full Reconveyance. Please see below for an example:
You own a home and the fair market value of your home is $450,000.00. You have a 1st mortgage on your home and the balance owed on that mortgage is $500,000.00. You also have a 2nd mortgage on your home and the balance owed on that mortgage is $75,000.00. You would file a Motion to Value within your bankruptcy case. In that motion, you allege the above figures (i.e. that your home is worth $450,000.00 and you owe $500,000.00 on your 1st mortgage). If you are able to prove this to the Judge, the Judge would then enter an Order granting your motion. Now, the junior lien (i.e. the one that is owed $75,000.00) is treated as a general unsecured debt, the secured portion is valued at $0.00, and that creditor is required to “strip” that lien off after your discharge is entered.
However, here is the caveat----this is ONLY available in a Chapter 13 bankruptcy.
Debt Limits
Looking at how much debt you have may also play a role on which chapter you choose to file. If you are filing a Chapter 7 Bankruptcy, there isn’t a limit on how much debt you can have in order to qualify for the filing. However, Chapter 13 cases are required to stay within a set guideline of debt in order to be eligible. To file a Chapter 13 Bankruptcy, the debtor cannot have more than $394,725.00 of unsecured debt (i.e. credit card bills, medical bills, etc.) and can’t have more than $1,184,200.00 of secured debt (i.e. home loans, car loans, etc.). If they are over those limits, they are ineligible for a Chapter 13 filing and will have to look at other options.
Type of Debtor
Depending on who is actually filing for bankruptcy relief will play a role in which chapter you consider. Chapter 7 bankruptcies are available to both individuals and businesses. However, Chapter 13 bankruptcy cases are only available to individual filers. A business is not allowed to, pursuant to the United States Bankruptcy Code, file for relief under Chapter 13. Therefore, if a business wants to continue to operate and does not want to go through the Chapter 7 liquidation process, they might want to consider a Chapter 11 bankruptcy. Chapter 11 cases have similarities to Chapter 13 cases (i.e. reorganizes debt without going through the liquidation process) but are not restricted by certain thresholds in Chapter 13 (i.e. no debt limits in Chapter 11; available for both individuals and businesses).
Amount of Hearings
For both a Chapter 7 and Chapter 13 filing, the debtor and his or her attorney are required to attend the 341 Meeting of Creditors. In most Chapter 7 cases, that is the only hearing that the debtor and his or her attorney will attend. That hearing will be in front of a Trustee and not a Judge.
However, Chapter 13 cases generally can have several other hearings throughout the case and those would be in front of a Judge. The attorney can likely attend those hearings on behalf of the debtor unless the Judge specifically orders the Debtor to appear. These additional hearings include, but are not limited to, confirmation hearings, objections to confirmation, motions to value, objections to claims, motions to dismiss, motions to modify, and motions to amend.
Effect on Credit Report
Future potential creditors might consider one chapter “better” than another. There isn’t an exact quantification to this but it is possible that future potential lenders feel that filing for Chapter 13 makes you a better candidate for future credit than had you filed a Chapter 7. The reason being is that in a Chapter 13, you are committing to a plan to pay a portion of your debt back rather than not paying any of it in a Chapter 7. This likely won’t be a deciding factor on which chapter you actually file but it is worth mentioning here.
Conclusion
As you can see above, there are major differences between both Chapter 7 and Chapter 13 bankruptcy cases. There are certain advantages afforded to one chapter and not the other. There might be a certain reason a certain debtor should file one chapter over the other. All of this should be discussed with a highly trained bankruptcy attorney. Here at Sacramento Bankruptcy Lawyer, we would love the opportunity to discuss your case with you and assist you in choosing the most beneficial option.
We help clients in the following areas: Sacramento, Elk Grove, South Sacramento, West Sacramento, Natomas, Citrus Heights, Antelope, Fair Oaks, Gold River, Rancho Cordova, Roseville, Rocklin, Lincoln, Wheatland, Yuba City, Marysville, Woodland, Davis, and Lodi.
