Chapter 7 or Chapter 13- Which Bankruptcy Chapter Do I Need?

Clients are often confused about chapter 7 and chapter 13  bankruptcies.  (There is also a chapter 12 for farmers and chapter 11 for businesses).   A chapter 7 is the one where you get a discharge of your debts 90 days after you file.  The 7 has a very short timeline and clients like it because of the simplicity and speed at which it is processed.  The debtor (the person who files bankruptcy) attends the 341 hearing (meeting of creditors) 30 days after he or she files bankruptcy.  The creditors rarely show up at the 341 hearing so it’s just you, the attorney, and the Trustee who are in attendance.  The bankruptcy discharge is then usually granted another 60 days later.

The debtor must list all of their assets and debts in their bankruptcy schedules when they file.  The debtor must list their secured creditors separately from the unsecured creditors and the debtor must list whether they intend to keep their secured assets or surrender them.  The debtor must also list their income, expenses, all of their personal property, a statement of financial affairs, and do the means test.  There are also a few other schedules that must be completed but these are the main ones.  (Check my previous blog for an explanation of the means test).  When the schedules are completed then this information is filed with the Bankruptcy Court.

The 7 is most popular but there is also a chapter 13 where you pay back all or part of your debts over a period of 3 to 5 years.  This chapter is useful when you make too much money for a Chapter 7, or if you need to protect assets from trustee, or if you need to make up back mortgage payments and pay them out over the next 3 to 5 years.

Also you can strip off a second mortgage in a chapter 13 if it is totally unsecured.  A totally unsecured second mortgage is one where the value of the house is less than the value of the first mortgage leaving the second with no equity to attach to.  Stripping it off means that you get rid of it, you don’t pay it, and it goes away.

“Cramdown” is also useful in a 13 where you reduce the value of the loan on an asset in the bankruptcy to the value of the asset.  So if you have a car worth $10,000 but the loan value (the amount you owe) is $20,000, you would only have to pay back the $10,000 (over 3 to 5 years) to keep the car in the bankruptcy as the loan would be “crammed down” to $10,000.  The remaining $10,000 on the loan would go away and the finance company would never be able to collect it from you.  You must continue your payments for the full 3 to 5 years to get your discharge at the end of the chapter 13.  This is hard for many people and they sometimes drop out of these plans and then their debt returns.

So a 7 with the possibility of getting rid of all your credit card, medical, personal loan debt in 90 days is still the most popular form of bankruptcy by far and most people choose this one.  13s are rarer but available and advisable under the right circumstances.

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