When you are in debt and cannot find a clear way to pay off the debt, bankruptcy may be one solution. However, before filing, you should know the difference between Chapter 13 bankruptcy and Chapter 7 bankruptcy. Which chapter of the bankruptcy code you should use will depend largely on your disposable income.
The Means Test for Bankruptcy
The bankruptcy court will use your household income to determine whether you are eligible to file for Chapter 7 bankruptcy. Since Chapter 7 eliminates most consumer debt, the court’s goal will be to make sure you cannot repay the debt. If the court determines your income is above the threshold allowed for Chapter 7, your disposable income will be used to determine the length of your Chapter 13 bankruptcy.
Understanding Bankruptcy Exemptions
The State of California allows consumers facing bankruptcy to claim certain exemptions. For example, the homestead exemption may allow you to keep your home if your lender agrees to have you repay any arrears on your mortgage. Other exemptions include certain personal property including burial plots, clothing, etc. Your bankruptcy attorney in Los Angeles can help you determine which property is safe from liquidation with a Chapter 7 filing.
Significant Differences Between Chapter 13 and Chapter 7
The primary difference between Chapter 13 and Chapter 7 bankruptcy is what debts are eliminated. For example, in most cases, past due taxes, arrears related to child or spousal support and student loans must be repaid. However, a Chapter 7 bankruptcy filing can wipe out all consumer debt. Generally, debt that is discharged in Chapter 7 includes credit card debt, medical debt, and other revolving lines of credit.
Chapter 7 Bankruptcy
Depending on the position your creditors take, the bankruptcy trustee may force you to sell some property. For example, if you own two homes, a primary residence and a vacation home, the trustee may force you to sell the vacation home to repay debts if you are eligible for Chapter 7 bankruptcy. Your bankruptcy attorney in Los Angeles can help you review the exclusions you can take and help you determine if any property will have to be sold before you file for bankruptcy protection.
Chapter 13 Bankruptcy
With Chapter 13, you are repaying most debt over time. The bankruptcy trustee will require you to put a plan in place to repay the debt you owe. Typically, a Chapter 13 plan will last between three and five years depending on the amount of disposable income you have.
Ability to Refile Bankruptcy
Another important difference between Chapter 7 bankruptcy and Chapter 13 bankruptcy has to do with time constraints. For example, if you filed for Chapter 7 protection during the previous two years, you would be ineligible to r3efile. There is no similar restriction for those who have filed Chapter 13.
Chapter 13 and Chapter 7 Discharge
When a Chapter 7 bankruptcy is discharged, your revolving consumer debt will be eliminated. Under Chapter 13 bankruptcy, the balance of debts after you have satisfied the terms of the payment plan will be eliminated. Keep in mind, there are certain priority debts such as taxes and child support that will be paid in full which if not paid off before discharge will still need to be paid.
Filing for bankruptcy is a serious decision and we encourage you to contact Oaktree Law Firm and speak with an experienced bankruptcy attorney in Los Angeles. There is no charge for an initial consultation.