CHAPTER 7 VS. CHAPTER 13

It is sometimes difficult for debtors when they have to decide between filing a Chapter 7 bankruptcy and a Chapter 13 bankruptcy.  Below is a quick comparison between the two that is meant to illustrate some of the pros and cons to each type of case.

Chapter 7 Bankruptcy Chapter 13 Bankruptcy
The case can often be discharged and closed in as little as three to four months after filing the case. The case generally will last three to five years (36-60 months).
The Chapter 7 trustee may take and sell property that is not completely covered by an exemption (although in the majority of cases the debtor keeps all of his or her property). The debtor generally keeps all of his property but must make a monthly payment to the Chapter 13 trustee that lasts 36-60 months.
Most of the debtor’s general unsecured debts are usually completely eliminated (discharged). The debtor is usually required to pay back something to general unsecured creditors (although it is often pennies on the dollar).
Priority tax debt is not discharged and the debtor will be required to deal with the IRS and other taxing authorities after the case is filed. The debtor’s priority tax debt is not discharged but is paid back through the bankruptcy plan and once the case is filed interest and penalties stop accruing.
If a debtor is behind on mortgage payments and wants to keep the house the debtor must get caught up on the debt or make arrangements to do so with the bank.  If the debtor can’t get caught up the bank may foreclose. The debtor pays all of the mortgage back payments (arrears) through the bankruptcy plan and usually makes ongoing payments directly to the bank so by the end of the Chapter 13 plan the debtor is all caught up with the mortgage payments.
A debtor may NOT strip a second mortgage from the home but a debtor may still strip judgment liens from a home. A debtor may be able to strip a second mortgage lien under certain conditions and a debtor may strip judgment liens from a home.
Chapter 7 cases generally cost less money in attorney fees than Chapter 13 cases. Chapter 13 cases cost more generally than Chapter 7 cases but most of the attorney fees are usually paid through the Chapter 13 plan over time.
Debtors must earn less than the median income for their states or must pass the Means Test in order to be able to file.  There is not debt limit when filing a Chapter 7 case. There is no income limit in filing a Chapter 13 case (although the debtor’s income may affect the payment amount).  In order to file a Chapter 13 case, a debtor must have less than $360,475 of unsecured debt and $1,081,400 of secured debt as of April 1, 2010.  This figure is adjusted every three years.
The debtor will usually be stuck with the same terms on secured debt (like car loans) when it comes to interest rate, principle amount and car payment if the debtor wants to keep the property secured by the debt. Under certain circumstances a debtor may pay a secured debt through the Chapter 13 plan and may be able to “cram down” the interest rate and principle amount and thereby lower the payment.

 

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Justin M. Myers Attorney-At-Law, LLC

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