Chapter 7 or Chapter 13 Bankruptcy: What’s the Difference?
When individuals file for bankruptcy, one of the first choices they must make is under which chapter of the Bankruptcy Code to file their case. In general, individuals choose to file either under Chapter 7 or Chapter 13. Each of these chapters provides its own set of rules and offers different advantages and disadvantages for debtors.
If you’re considering filing bankruptcy in Nevada, it’s important that you understand the key differences between these two chapters. This post provides a general overview of each, but for more information and help when filing, you should consult a knowledgeable Las Vegas bankruptcy attorney from Freedom Law Firm.
Chapter 7: Liquidation
Chapter 7 bankruptcy is known as a “liquidation” bankruptcy. That’s because, in a Chapter 7 bankruptcy, the case trustee will liquidate (i.e., sell) your non-exempt property and apply the proceeds to pay off as much of your outstanding debts as possible. What property is exempt from liquidation, and what property is subject to liquidation, depends on state law.
Fortunately, in practice, the “liquidation” label is misplaced. In most Chapter 7 cases, a debtor can protect all of his or her property using the available bankruptcy exemptions. In such cases, known as “no asset” bankruptcies, the debtor gets to keep all of his or her property, including his or her home, car, furniture, and clothing.
At the end of a Chapter 7 bankruptcy, the bankruptcy court will discharge your remaining unsecured debts. After the bankruptcy discharge, you will no longer be legally responsible for repaying those debts, and the creditors that hold them will be prohibited from attempting to collect them.
However, not everyone is eligible to file for bankruptcy under Chapter 7, because Chapter 7 is intended for those individuals who are unable to pay their debts. Generally speaking, if your monthly income is less than the median income for a comparable household in Nevada, then you can file for Chapter 7.
Otherwise, you will only be able to file under Chapter 7 if you pass the “means test,” which looks at your disposable income after accounting for certain kinds of expenses. If your income is too high to qualify for Chapter 7, you will have to file under Chapter 13.
Chapter 13: Wage Earner’s Plan
Chapter 13 bankruptcy is sometimes referred to as a “wage earner’s plan.” Unlike in a Chapter 7 bankruptcy, the case trustee will not sell your property—regardless of whether it is exempt or not. Instead, you will devise a repayment plan to pay back your creditors as much as possible over the next three to five years.
Like your eligibility for Chapter 7 bankruptcy, how long your repayment plan will last depends on your monthly income. If it is less than the state median for households of comparable size in Nevada, then your repayment plan will typically last for three years. Otherwise, it will generally last for five years.
Your repayment plan will have to address three types of debt: priority debt, secured debt, and unsecured debt. Your plan must provide for repayment of priority debts in full, which include such things as most taxes, child support, and criminal fines.
For secured debt, if you want to keep the property used as collateral (e.g., your house or car), you must either pay the full value of the collateral during your plan or the full amount due on the debt, depending on the circumstances.
Finally, for unsecured debt, you will have to ensure that the creditors receive at least as much as they would have had you filed under Chapter 7. In other words, you will need to determine how much your creditors would have received if your non-exempt property had been liquidated, and then pay them at least that much over the term of your repayment plan.
However, it is possible to have too much debt to qualify for Chapter 13 bankruptcy. Only if your unsecured debts are less than $394,725 and your secured debts are less than $1,184,200 will you be eligible for Chapter 13.
Chapter 7 or Chapter 13: Which is Better for You?
Both Chapter 7 and Chapter 13 offer their own advantages for debtors. For example, in a Chapter 7 case, you can receive a discharge much more quickly than under Chapter 13. On the other hand, if you have substantial non-exempt property, you may prefer to file under Chapter 13 so you don’t have to give it up.
There are also other advantages of each that go beyond the scope of this brief comparison.
Ultimately, which type of bankruptcy is right for you depends on your individual circumstances. If you’re interested in exploring whether bankruptcy is a good choice for you, and whether Chapter 7 or Chapter 13 is a better fit for your circumstances, contact the experienced Las Vegas bankruptcy attorneys of Freedom Law Firm today for a free consultation.