This detailed and practical comparison of the two most common bankruptcy options – Chapter 7 vs 13 bankruptcy – explains which situations each chapter is best for.
Chapter 7 is the most popular chapter of bankruptcy among the majority of debtors. A Chapter 7 bankruptcy will eliminate the vast majority of debts in a quick amount of time and allow the debtor to start fresh. Debtors prefer this chapter over Chapter 13 because it is faster and more affordable.
An ideal Chapter 7 debtor is someone who may have recently been divorced, lost their job, had their income reduced significantly, went through a tough medical issue that left them behind on their normal bills or has been foreclosed on or had a vehicle repossessed. A Chapter 7 provides the debtor with the best opportunity to regain their life and have a fresh start.
Chapter 7 Means Test
The most important aspect to a Chapter 7 case is being able to qualify. Bankruptcy laws require that the household income for the debtor be at or below the median income for a similar sized household in the state. If the debtor’s income is above the median income, they can still qualify under the Means Test. The Means Test weighs the monthly income and necessary expenses of a debtor trying to qualify for Chapter 7. The debtor may file Chapter 7 if their disposable income falls below a certain amount. The Means Test is challenging; therefore, we recommend enlisting help from an experienced attorney.
Upon qualifying for Chapter 7, the next step in the process is filing the petition. The petition is where the debtor will list all their debts so that their creditors receive notice of their filing. It is important to list every creditor to ensure that every debt is discharged. The petition is also where the debtor will list their personal belongings, such as furniture, clothing and jewelry, as well as more important property, such as vehicles and real property.
Arkansas has specific bankruptcy exemptions that may protect these belongings. Most debtors are able to keep their home and cars in Chapter 7. Occasionally, a debtor will have more value in their property than the exemptions can protect. If that occurs, the debtor may have to pay some money to the bankruptcy court to keep their property. Otherwise, they can choose to surrender the property as well. An experienced bankruptcy attorney may assist with this process to ensure proper protection of all assets.
Upon filing a Chapter 7 bankruptcy, the court imposes an automatic stay. In addition, the court freezes all creditor actions immediately. An automatic stay blocks the creditor from moving forward with any collection matters, ranging from lawsuits to phone calls. Creditors are not allowed to contact the debtor without permission from the debtor or the court. If the creditor is currently attempting to foreclose or repossess a vehicle, that action stops immediately upon filing a bankruptcy.
Meeting of Creditors
The court sets the 341 meeting of creditors after filing occurs. The debtor will be required to attend the meeting with their attorney, if represented. The meeting can be short and simple if the case is not complicated and the trustee has been given all the necessary documentation. Creditors do not normally attend the meeting. Assuming the case has no other pressing issues, discharge of debts occurs two months after the meeting date and the case will close. The typical Chapter 7 case lasts three to four months.
Discharge Of Debts
Upon receiving their discharge, debtors will no longer owe any previous dischargeable debts. Non-dischargeable debts include: child support/alimony, most tax debts, student loans and debts related to criminal convictions. All other debts, such as credit cards, medical bills, and all other unsecured debts will be eliminated and the debtor will have their fresh start.
Chapter 13 is a reorganization of your debt. Unlike Chapter 7, the process is significantly longer and debts are not discharged until the end of the process after receiving a certain amount of money. The Chapter 13 process lasts anywhere from three to five years and the debtor will have to make a monthly payment to the court.
The disposable income of the debtor, as well as other issues, determines the monthly payment amount. Those issues range from debts owed to having to pay a certain amount to keep personal assets. An experienced attorney can assist the debtor with knowing how much they might have to pay in a Chapter 13.
Reasons To File Chapter 13
Chapter 13 clients differ from Chapter 7 clients. The majority of people who don’t qualify for Chapter 7 file Chapter 13 instead. Some people who file are trying to save their homes from foreclosure. Other debtors are filing because they have too much equity in their personal belongings and need long payment period of Chapter 13. Lastly, some debtors file Chapter 13 because they owe back taxes or other similar debts and can toll the interest on said debts while they are in the Chapter 13.
The most important part of a Chapter 13 bankruptcy case is the confirmation plan. This plan will state the duration of the case, three to five years, and the monthly amount of the payment that the debtor will pay to the court. Various creditors, the court, the trustee, and the attorney all receive a portion of this monthly payment. Creditors can either accept the terms of the plan or object to them. If they object, the debtor will have a chance to defend the terms of their plan in front of the bankruptcy judge.
If the debtor has filed a Chapter 13 to save their home, they will have time during the length of the bankruptcy to catch up on any arrears and possibly modify their plan.
At the end of the term of the payment plan, all debts (outside of the secured ones that were not paid off in full by plan’s end) will be considered discharged for the most part. As is the case in a Chapter 7, certain debts are non-dischargeable such as student loans and alimony.