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Chapter 7 vs 13 Bankruptcy

Understanding the Crucial Differences

People who plan to file for bankruptcy in Murrieta need to know that there are two types of consumer bankruptcy. The first is Chapter 7 bankruptcy, also known as "liquidation bankruptcy", which is usually ideal for people who have lower incomes. The second is Chapter 13 bankruptcy and is typically filed for by people who have enough income to repay the debt they owe to their creditors.

If you are thinking of filing for Chapter 7 or Chapter 13, understanding the differences will help you choose the right type of bankruptcy for your individual situation.

Below, a Murrieta bankruptcy lawyer at Singleton Smith Law Offices explains several of the differences between these two types of consumer bankruptcy:

  • Liquidation: when people file for Chapter 7, they must go through the process of liquidation. However, when they file for Chapter 13, they do not have to go through this process. During liquidation, people's assets, property and valuables are sold for a profit. The profit is then turned over to their creditors to repay the debt that they owe.
  • Repayment of Debts: people who file for Chapter 13 will have to repay the debt that they owe to their creditors. They will be responsible for coming up with repayment plans and will need to make monthly payments toward their debt over the course of 3 - 5 years. People who file for Chapter 7 do not have to repay their creditors as their debt is discharged.
  • Debt Discharge: anytime people file for Chapter 7, they usually do so to have their debts discharged. When people's debts have been discharged, they are officially eliminated and people are no longer responsible for repaying their creditors. If people file for Chapter 13, their debts are not discharged. Instead, the debts are repaid.

Should I File for Chapter 7 or Chapter 13 Bankruptcy?

  • Chapter 7: Total Liquidation

When your burden of debt seems truly inescapable, Chapter 7 bankruptcy is likely the form you should consider. It is generally reserved only for people that have no other choice than bankruptcy, and so it is not granted to just anyone. In order to use Chapter 7, you must pass the means test, which essentially compares your average annual earnings to that of other people in your state; if you make more than the mean salary in your state, you will not be permitted to use Chapter 7 bankruptcy and have failed the means test.

If you do pass the means test, you will see much of your debt entirely discharged. Depending on your unique circumstance, all of your unsecured and secured debt could be discharged. Although, you must be aware that it is common for collateral property, such as homes, cars, and other valuable assets, to be collected by creditors in exchange for total debt discharge. Do not file for Chapter 7 without first checking with a lawyer to see how much you could possibly lose.

  • Chapter 13: Gradual Repayment

The process of Chapter 13 bankruptcy is noticeably different from Chapter 7, as it can benefit both you and creditors through some leniency. Rather than having the majority or all of your debt completely erased, it will be reduced by a certain percentage. Whatever is left after the reduction will need to be repaid over the course of three to five years. If you make an honest effort to complete your repayments but still fail to repay some of it at the end of the repayment plan, the leftovers will typically be discharged.

Since you are not completely dropping your debts and still repaying certain amounts to creditors, your collateral property will likely be protected from collection. On average, people who successfully use Chapter 13 bankruptcy keep more of their personal property than people who use Chapter 7. You should consider this possibility if you are in debt but believe with some useful restructuring you could manage your debt and get out.

Secured Debts & Automatic Stays

Between Chapter 13 and Chapter 7 bankruptcies, there are many dissimilarities but also a few similarities. Out of the things that are the same, the two most noticeable are secured debts and automatic stays.

  • Secured Debts: In both forms of bankruptcy, you are likely to come across secured debts. Any debt that is secured will typically be unalterable during bankruptcy, meaning it cannot be discharged or diminished. This is not always the case, as previously mentioned, but for the most part, only unsecured debts will be eliminated. Any debt not eliminated needs to be repaid or compensated through collateral property.
  • Automatic Stays: Automatic stays are court orders that are triggered the moment you file for bankruptcy and that block you from creditors and any form of harassment they may have been using against you previously, as well as locking your finances away from them. If you were having your wages garnished by a creditor, the garnishment would be frozen while your bankruptcy progresses; ideally, the garnishment will be removed through bankruptcy. If you were receiving calls or letters from creditors, they would have to cease and desist that behavior and leave you completely alone until the bankruptcy concludes.

To learn more about the differences between Chapter 7 and Chapter 13, contact a Murrieta bankruptcy attorney from Singleton Smith Law Offices today!

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