What is the Difference Between Chapter 7 Bankruptcy and Chapter 13 Bankruptcy?
There are different types of bankruptcy designed to help different types of debt problems. Most consumers file either a chapter 7 or chapter 13 bankruptcy. In this article I will walk you through the differences between a chapter 7 and a chapter 13 and why you might choose on over the other.
Chapter 7 Bankruptcy – Credit Card Killer
The overwhelming majority of bankruptcy cases are filed under chapter 7 of the Bankruptcy Code. Chapter 7 is really great and eliminating unsecured debts. What is an unsecured debt? These are debts where there is no property or collateral attached to the loan. The most common unsecured debts are credit cards, medical bills, personal loans, etc.
In a chapter 7 bankruptcy general unsecured debts are usually completely eliminated – or “discharged” in bankruptcy lingo. There are some types of unsecured debts that don’t go away, like most taxes, child support, and student loans, but pretty much everything else will be wiped out in your bankruptcy case.
Facing Foreclosure or Repossession? Chapter 7 Might Not Be Your Best Option
Chapter 7 is not good at dealing with debt problems associated with secured debts like mortgage loans and car loans. If you are behind on your house payment or your car payment then chapter 7 will save you from foreclosure or repossession but likely not for long.
There are no provisions in a chapter 7 to help you get caught up on your house payments or car payments – it really boils down to a “take it or leave” situation when it comes to secured debts. Make the payment, keep the car, if you can’t make the payment you can surrender it and you won’t owe anything moving forward.
Unless you surrender your home or surrender your car you will still owe the mortgage loan or the car loan even after your bankruptcy case has been discharged.
How Long Does a Chapter 7 Bankruptcy Last?
Here in Arizona the typical chapter 7 bankruptcy will take about five (5) months from the day the case is filed with the court. Note this is the time that it takes to receive your Discharge Order from the court. Your case could last longer if there are assets that need to be liquidated as part of your case. Which leads right into the next topic…
Will I Lose All of My Assets?
This is a big worry that most people have about filing for bankruptcy. And while it is possible that you could lose assets in most cases it is not an issue.
Chapter 7 bankruptcy is a “liquidating” bankruptcy. This means that you have to disclose not only all of your debts, but you must disclose all of your of your assets.
Most assets you have are protected by Arizona’s exemption laws. Here is an example of some of the assets that are protected under Arizona’s exemption statutes:
- Vehicle Exemption – Each person filing for bankruptcy is permitted to have a vehicle with no more than $6,000 in equity.
- Homestead Exemption – The current homestead exemption protects up to $150,000 in equity.
- Household Goods – household goods, including personal electronics (computers, laptops, iPads, etc.) are complete exempt up to $6,000 ($12,000 for couples). The value of these assets is based upon liquidation value (i.e. what could you get on Craig’s List).
- Wedding Rings – wedding rings are protected up to $2,000 in liquidation value.
- Retirement Accounts – retirement accounts like 401(k) or IRA accounts are completely exempt (protected) under Arizona and federal law.
Do You Qualify for Chapter 7 Bankruptcy?
You may think that all you need to qualify for a chapter 7 bankruptcy is debt. However back in 2005 they changed the rules and now you must qualify to file for chapter 7 based upon your household size and income.
The household income limits are set by The Department of Justice and are based upon household income levels for people who live in your area.
These numbers are changing all of the time. You can see what income levels qualify for a chapter 7 bankruptcy by checking out the United States Trustee’s website and their latest tables. You can access that by clicking HERE.
It is important to note that even if your income is too high for a chapter 7 filing you may still qualify by taking various deductions that are available under the Bankruptcy Code. There are dozens of deductions – here are a few of the most used deductions:
- Taxes that are taken out of your paycheck
- Mandatory retirement deductions (i.e. Arizona State Retirement plans)
- Health insurance premiums
- Mortgage payments
- Car payments
- Medical care expenses
- Charitable contributions, including tithings paid to churches
- Term life insurance premiums
- Contributions paid in support of family members who do not live in your home
- Educational expenses for your children under the age of 18
And there are several others. The point is even if you are over the income limits to qualify for a chapter 7 bankruptcy you may still qualify if you can reduce your income enough by taking the various deductions.
What About Chapter 13 Bankruptcy?
In the next article I will go over the specifics as to chapter 13 bankruptcy and discuss some of the powerful tools available to chapter 13 bankruptcy filers.
Want to Learn More about Chapter 7 Bankruptcy?
If it sounds like a chapter 7 may be appropriate for your debt situation feel free tor each out to me at (480) 420-4028 and I can set up a free consultation to discuss how we can put together a plan to help you get out of debt once and for all.