Bankruptcy Law 101: Chapter 7 Vs. Chapter 13

With the COVID-19 pandemic, many people struggle to make ends meet. In fact, most of them opt for a fresh start and ended up filing for bankruptcy. Not surprisingly, the number of people who filed for bankruptcy in Los Angeles jumped in 2020 compared to previous years.

Bankruptcy allows consumers to choose between two types of debt relief: Chapter 7 and Chapter 13. For those who are not familiar with bankruptcy law, don’t fret—we list down the differences between the two.

Why File A Chapter 7 Bankruptcy

A Chapter 7 bankruptcy, also known as a “liquidation” bankruptcy, erases all the debt that is legal to erase. Many people want to apply for this debt relief because it gives you a fresh, financial start.

Generally, the court will appoint a bankruptcy trustee who will examine your property to determine which ones they could liquidate to pay off your debt. Some assets are exempted from this liquidation, including any property you’ll acquire after filing. The types of property differ per state, but these usually include:

  • Home equity
  • Insurance
  • Personal property like furniture, appliances, and books
  • Retirement plans

After the trustee distributes your nonexempt property to creditors, the court will close the case.

Unfortunately, this debt relief isn’t available to everyone. You must first qualify by meeting a means test. If, through the test, it’s discovered that you have enough income to pay off your debt, you won’t qualify for a Chapter 7 bankruptcy.

Also, a Chapter 7 bankruptcy doesn’t eliminate certain types of debt. It doesn’t cover child support, student loans, and certain taxes. If you incurred debt due to fraud, filing for a Chapter 7 bankruptcy won’t erase it either.

Why Chapter 13 Bankruptcy Might Be Better For You

On the other hand, a Chapter 13 bankruptcy offers to pay your debt in a structured repayment plan. After filing, the court appoints a trustee who will work with you to determine how much you need to pay per month and how long you need to pay. Usually, repayment plans last between three and five years.

A Chapter 13 bankruptcy is great for those who didn’t qualify for Chapter 7. If you also want to keep nonexempt property, a Chapter 13 bankruptcy is also a better choice of debt relief. Another reason for choosing this type of debt relief is if you have debt that is not dischargeable under Chapter 7. These include:

  • Court fees
  • Fees from a condominium, a cooperative, or a homeowner’s association
  • Debts to pay nondischargeable taxes
  • Marital debts agreed to in a settlement agreement, including orders for support

One of the benefits of a Chapter 13 bankruptcy is that the trustee doesn’t sell your property. This is good news if you own luxury items, which are usually sold under a Chapter 7 bankruptcy.

Another advantage of filing a Chapter 13 bankruptcy is that the trustee is usually flexible in the repayment plan. You can choose to make a consolidated monthly payment, or you can ask to reduce the monthly payments for certain types of debts.

However, this type of debt relief has its downsides, too. For one, you have to pay off your debt using your disposable income during the duration of the plan. This might be a struggle if your income is variable. If you can’t stick to the repayment plan, the court may convert your case to a Chapter 7, which means you could risk losing your possessions like your house and car.

Bankruptcy is a major decision with serious consequences. Although it can give you a fresh start, it may not always be the case when you don’t choose the debt relief that’s right for you. When choosing between a Chapter 7 and a Chapter 13 bankruptcy, it’s better to seek help from a bankruptcy lawyer.

Your Trusted Bankruptcy Lawyer In Los Angeles

When your debt feels overwhelming, filing bankruptcy with the help of a skilled lawyer may be the answer. At The Law Office of R. Grace Rodriguez, our bankruptcy lawyers help you find the best debt relief solution to your problem.
We review your financial history to help you determine whether you’re eligible for any debt relief. Then, we guide you through every step of the process until you restructure your debt and take back your life.
Regain control of your finances today. To learn more about our services, get in touch with us at (818) 734-7223.

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