Chapter 7 Bankruptcy vs. Chapter 13 Bankruptcy
There are different types of bankruptcy. Bankruptcy cases are managed at the federal level, so the same principles apply no matter where you seek bankruptcy protection. However, California has exemption laws which dictate how much property a debtor can shield from their creditors.
Chapter 7 BankruptcyWhen you file for Chapter 7 bankruptcy, you essentially sell assets to a trustee, who in turn sells them to settle your debts. This process is called liquidation. Your creditors receive the net proceeds of the liquidation. You can discharge many debts, including credit card debt and other unsecured debts, although not alimony, student loans, child support, or fraudulent debts. Most of the time, all dischargeable can be eliminated. But before you can proceed, you must pass the means test.
The bankruptcy means test is used to show whether your income exceeds a certain threshold. There are two forms that serve this purpose:
Form 122A-1: Chapter 7 Statement of Your Current Monthly Income: Allows you to document your marital and filing status, and compares your monthly income to the median in your state based on household size. Once you calculate your annual income, and it is below the median income specific to your state, you may be eligible to file for Chapter 7 bankruptcy.
Form 122A-2: Chapter 7 Means Test Calculation: Uses your income and expenses to calculate your disposable income. The form is required if your income exceeds the state*s median, and helps determine how much money you have to pay off your debts. If this amount is high enough, you may not qualify to file for bankruptcy. Having too much income to qualify is called presumption of abuse, although you may still qualify under special circumstances.
You can pass the means tests and still not qualify for bankruptcy. Filing bankruptcy is not always the best option, so you may need to:
Go for bankruptcy counseling
File a bankruptcy court petition
Meet with creditors to discuss your situation
So who is eligible to file for Chapter 7 bankruptcy? Various parties, including your bankruptcy attorney, will look at several factors. These include having little or no disposable income, debts that would take five or more years to pay off, and that add up to more than half your annual income. Before filing, it*s important to weigh all your options. The process requires a good deal of paperwork and, after filing, you*ll appear in court with a judge and trustee; unless an objection is filed, a discharge can be completed in 60 days.
The advantages of a Chapter 7 bankruptcy filing include:
A fresh start, with only secured assets owned
Protection against collections actions and wage garnishments
You keep all wages and acquired property (except inheritances)
Cases are usually over in 3 to 6 months
There are no minimum debt requirements
However, the disadvantages to filing in California including losing non-exempt property. To keep a car or home, either opt out of Chapter 7 or sign a reaffirmation agreement. You must then continue paying these debts, and any back payments owed.
Chapter 7 is only a temporary defense against foreclosure
Co-signers of a loan retain the debt unless they file for protection
If your debts are discharged, you must wait eight years to file again
A Chapter 7 filing remains on your credit report for up to 10 years
Chapter 13 BankruptcyUnder a Chapter 13 filing, a 3- to 5-year repayment plan is proposed and options such as debt consolidation or reorganization are available. To be eligible for Chapter 13 bankruptcy, you must be a wage earner and have regular income. It is generally used by those who intend to keep their home, car, or other secured assets and valuable nonexempt property.
With Chapter 13 bankruptcy, you can make up overdue payments over time. Your original agreement can be reinstated as well. Eligibility is also determined by the means test, although if you failed the means test for Chapter 7, you may be able to explore filing for Chapter 13 bankruptcy. However, the means test enables you to deduct some expenses and measures your ability to pay back debt in a Chapter 13. If you determine you*ll have enough to pay your debt over five years, Chapter 13 is the way to go.
The process, however, requires additional qualifying tests. These include the best interest of creditors test, which shows unsecured creditors would have at least as much on their claim as with a Chapter 7 filing. The best efforts test shows all your projected disposable income is paid towards the plan. Once you file, you must start making payments within 30 days, and continue doing so every month in the form of money orders, cashier*s checks, other certified funds, or as a voluntary wage deduction, even if confirmation of your plan is pending.
Once all your plan payments and terms are completed, your dischargeable debts are discharged.
A Chapter 13 payment plan enables you to:
Keep all exempt and non-exempt property
Reduce some debts
Avoid collection efforts and wage garnishment
Avoid foreclosure as long as you stick to the terms
Take more time to pay debts
Separate creditors by class, especially when a co-debtor is involved
There are some disadvantages. For example, a Chapter 13 filing stays on your credit report for seven to ten years. Also, since the payment plan uses your post-bankruptcy income, your cash is tied up for the entire plan period. A Chapter 13 filing involves higher legal fees and you will remain involved with the bankruptcy court for the duration of the term period.
For professional legal advice, to learn whether Chapter 7 or Chapter 13 bankruptcy is right for you, and to receive assistance with filing, contact OakTree Law at 562-219-2979 or visit us online at https://oaktreelaw.com.