Chapter 7 vs. Chapter 13

Chapter 7 and Chapter 13 are two different ways to arrive at the same destination (A bankruptcy court discharge). In a chapter 7 case you get your discharge first, but the case remains open until the case trustee completes the process of liquidating your non-exempt assets. (Please be advised that the law provides you with a broad range of exemptions in property. You will need to talk to an attorney about the specifics of your situation) In a chapter 13 you make monthly payments to a  chapter 13 trustee that at least equal what the creditors would receive in a Chapter 7 liquidation.

Means Test Considerations

The 2005 bankruptcy reform act creates an objective criteria for making the Chapter 7 Chapter 13 decision. If your household income is over the median for household size and location, you must file a Chapter 13. In addition, if you have more than $100.00 per month of disposable income after deductions that are allowed by law for certain household necessaries, you generally must file a chapter 13.

Chapter 13 Advantage

Chapter 13 may be economically advantageous for many debtor with secured debt because it allows the bankruptcy debtor to create split claims and pay secured claims only to the extent of the value securing it. In a Chapter 7 case you must either keep paying most secured debt in full or exercise a "surrender" option by returning the collateral back to the secured creditor.

Chapter 13 allows you to keep non-exempt property, by making deferred cash payments to a chapter 13 trustee over the length of a plan. In a chapter 7 case non-exempt property is sold for it's value.

In a Chapter 13 case, you may be able to eliminate under secured second mortgages, while as in a simple liquidation, no such lien avoidance is allowed.

Chapter 13 vs. Consumer Credit Counseling

Chapter 13 can be used as a form of debt consolidation. It is far more effective because the Federal Court has the power to adjust your debts according to what you can afford to pay. A fairly typical chapter 13 plan might call for you to re-pay 20% of your credit card debt through a Chapter 13 trustee over a three year period. Since consumer credit counseling companies work directly with the people you owe money to, they are bound by the policies of the lender's who are seeking a full repayment of principle.

Chapter 13 vs. Debt Elimination

Debt elimination, described more fully in "alternatives", is an attempt to create a Chapter 13 plan without the legal authority of the bankruptcy court. For this reason most debt elimination plans fail and the client files for bankruptcy when the first creditor sues. Section 362 of title 11 (The automatic stay) is a federal injunction that prevents any actions by a creditor to collect a debt. The confirmation of a Chapter 13 plan is an order by a Federal Judge approving the debt reduction plan. It's really silly to try to eliminate debt in a non-bankruptcy "debt elimination plan" when Chapter 13 is available for "zero dollars down" through the Pacific Bankruptcy Center.

Chapter 7 advantage

If Chapter 7 is the right case for your situation, Chapter 7 is still the most cost effective form of debt relief available for those with primarily unsecured debt. If you're credit is used up, you're tired of harassing telephone calls, and generally feel no more moral or legal obligation to repay any debt, Chapter 7 may be right for you.

Chapter 7 eligibility

In addition to the new means test, chapter 7 debtors must also pass the "totality of the circumstances" test before being eligible for chapter 7 relief. In evaluating disposable income under Chapter 7 the court requires the disclosure of all "household income" including income of those not-related by blood or marriage.

Isn't Chapter 13 just for homeowners?

No! Chapter 13 can be used by anyone who desires to repay a percentage of their debt in a Chapter 13 reorganization plan. The Pacific Bankruptcy Center has filed 100's of chapter 13 cases for people who receive a social security and don't have any problems with foreclosure. Most of these people have received Chapter 13 debt relief for no money down, without a wage order!

 

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