The reasons to choose personal bankruptcy Chapter 7 vs 13 vary based on the specifics of the situation. When someone is ready to file bankruptcy, they are usually strapped for cash, so the fact that the bankruptcy Chapter 7 cost is lower than a Chapter 13 bankruptcy may be a factor in the type of bankruptcy they file. Bankruptcy is a legal process that allows individuals who have more debt than they can pay to get a fresh start.
What is the difference between Chapter 7 bankruptcy vs. Chapter 13 bankruptcy in California?
Chapter 7 bankruptcy is considered a reorganization that allows some assets to be liquidated and the proceeds used to repay a portion of the debts and eliminate any that cannot be paid with the existing assets. The person filing can choose to exclude some of their assets using a 703 or 704 exemption. A Chapter 7 bankruptcy is faster than a Chapter 13 bankruptcy.
Chapter 13 bankruptcy combines a repayment plan that can extend across three to five years. Some debt may be discharged, and some will be repaid with the payment plan that allows you to keep your property. A liquidation test is required to demonstrate that the unsecured creditors would receive at least as much as they would have received if a Chapter 7 bankruptcy were filed.
What are the types of bankruptcies for individuals in California?
Both individuals and businesses can file a Chapter 7 bankruptcy. Individuals can also file a Chapter 13 bankruptcy, but legal business entities such as partnerships, LLCs, and corporations cannot file a Chapter 13 bankruptcy. There are also limits based on the amount of unsecured debt and secured debt a debtor can have in a Chapter 13 bankruptcy. In a Chapter 7 bankruptcy, there are income limitations. If the person makes over the limit they may not qualify to file.
How long does it take for a discharge?
While a Chapter 7 bankruptcy could be completed in three to six months, in California, it typically takes nine to eighteen months for the court to issue the discharge letter.
Because a Chapter 13 bankruptcy involves a long-term repayment plan, it will take from three to over five years to discharge a Chapter 13 bankruptcy.
What happens to property owned by the debtor?
This is an area where there is a big difference in Chapter 7 vs Chapter 13 for individuals. In a Chapter 7 bankruptcy, the bankruptcy trustee can sell all non-exempt assets and use the proceeds to pay debts. There are two types of exemptions. You can learn more about them in this article. There are nuances to the exemptions that can make a big difference in the outcome. A knowledgeable bankruptcy attorney is a valuable asset when making important decisions about your filing.
In a Chapter 13 bankruptcy, the debtor keeps their property but they must pass a liquidation test and repay unsecured creditors the value of their nonexempt property.
What are the benefits and drawbacks of each type of bankruptcy?
The benefits of a Chapter 7 bankruptcy include:
- It is faster than a Chapter 13 bankruptcy so the debtor gets their fresh start quicker and can begin rebuilding their credit and getting on with their life faster.
- Unsecured debts do not have to be repaid.
- It costs less than a Chapter 13 bankruptcy.
- People can qualify to buy a house two years after they file bankruptcy
- The debtor may be able to keep their home if the equity is protected by an exemption and they are able to bring or keep their payments current
- The debtor may reaffirm some debts in lieu of forfeiting the property associated with the debt
- Ability to redeem property that secures a debt
The drawbacks of a Chapter 7 bankruptcy include:
- The debtor forfeits nonexempt assets
- It will have a negative effect on the debtors’ credit rating for a decade
- Some people feel guilty about not paying their debts even though the process is legal
- It does not provide a lot of time to bring a mortgage current to avoid foreclosure
The benefits of a Chapter 13 bankruptcy include:
- Your assets are not forfeit
- The court establishes a payment plan you can afford
- The bankruptcy falls off your credit report seven years after you file
- The ability to cramdown loan amounts on personal property and investment properties
- You can eliminate second mortgages if they are not secured by equity in the home
The drawbacks of a Chapter 13 bankruptcy include:
- If you have a closely held LLC or other business, it cannot be included
- Chapter 13 bankruptcy costs more than a Chapter 7 bankruptcy
- It takes years to get the discharge
- It may take longer to buy a home
How much does a Chapter 7 bankruptcy cost?
The costs associated with a Chapter 7 bankruptcy including the filing fee, which is currently $335, and the bankruptcy lawyer fees which vary between $1,000 to about $2,500 in California. You will also have to appear in court, so if you do not have paid time off, the cost of lost wages should also be considered.
You may also be required to take a credit management course that can cost anywhere from $20 to over $100.
How much does filing Chapter 7 cost vs Chapter 13?
|Type of Fee||Chapter 7 costs||Chapter 13 costs|
|Filing fee||$335||$281 – $310|
|Attorney fees||$1,000 – $2,500||Around $4,000|
Can you change from a Chapter 7 bankruptcy to a Chapter 13 or vice versa?
Yes, before the case is discharged, you can change a Chapter 7 filing to a Chapter 13. When you switch from a Chapter 7 to a Chapter 13 filing, there are no additional court costs, however, your attorney fees will be higher.
You may also switch from a Chapter 13 to a Chapter 7 if you meet the income limitations. You will have to pay the $25 difference in court filing fees if you make this switch.
What is redeeming property in a Chapter 7 bankruptcy?
If you have an asset that secures debt, for example a wedding ring or an RV, if the asset is worth less than you owe on it, you may be able to keep it by redeeming the property. In order to redeem an asset, you will have to be able to pay the current value of the asset to the creditor in one lump sum. Even during bankruptcy, you may be able to borrow in order to redeem an asset. You may also be able to borrow from your friends or family.
For example, if you bought a travel trailer to live in that depreciated as soon as you drove it off the lot, the value of the trailer may be less than you owe. If you can come up with the money to pay the value of the trailer to the creditor, you can redeem the trailer without paying the full amount owed.
Only tangible personal property is eligible for redemption. You cannot redeem real estate or intangible property such as stocks, bonds, or life insurance contracts.
If you and the creditor do not agree on the value of the asset, the bankruptcy court will hold a hearing to determine its value.
What is a cram down?
If the amount owed on a secured debt is more than the value of the asset securing the debt, you can cram down the amount you owe as a secured debt to the value of the asset. Any additional amounts are added to your unsecured debts and balances that are not covered by your Chapter 13 payment plan will be discharged in the bankruptcy. You must not have bought the asset in anticipation of bankruptcy (2½ years for cars and a year for other personal property).
Are there other ways to keep assets when you file Chapter 7?
Yes. The one thing not to do is attempt to hide assets. If a debtor is dishonest during the bankruptcy process, they may not be successful in getting their debts discharged and may face fines or even jail time for fraud.
However, if the debtor will be able to make payments on a specific debt and they want to keep the asset that secures the debt, they can reaffirm the debt. Reaffirming the debt is a legal word for saying that they agree to make payments on the debt. They must be current on the debt in order to reaffirm the debt. If the debt is in arrears, they are not allowed to reaffirm it.
How do you pay a bankruptcy lawyer?
When you file a Chapter 7 bankruptcy, most of the work is done early in the case. Because of that, many attorneys require debtors to pay the attorneys fees before they file. Some will allow you to pay in installments but will not file the case with the court until the debtor pays the full fee. If you file bankruptcy, your obligation to pay any debts that you are not going to reaffirm ceases immediately and creditors cannot call or write you attempting to collect the debts. If you have been making large payments on your debts each month, you may be able to pay the attorney instead of your creditors with your income the month you file.
Many bankruptcy attorneys are willing to allow payment plans to cover their fees in a Chapter 13 bankruptcy because their work is spread out over several years. Your repayment plan can include your attorney’s fees.
Do you need a lawyer to file bankruptcy?
While it is possible to file bankruptcy on your own, many do-it-yourself bankruptcies fail. Filing Chapter 7 bankruptcy in Los Angeles, meeting filing deadlines, choosing the type of bankruptcy, and choosing which exemptions to use are complex decisions that novices often do wrong. It would be easy to lose more than you save in attorneys’ fees with one wrong decision.
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