Individual debtors can choose from two chapters when they file bankruptcy: Chapter 7 vs Chapter 13. Chapter 7 is a complete discharge of any past debt of the debtor, excluding certain debt that is considered non-dischargeable. Chapter 13 is a reorganization of the debtor’s debt. Both chapters can be extremely helpful in the right situation.
The biggest difference between the two chapters is the time each chapter requires to complete. A Chapter 7 is a much quicker process than a Chapter 13. The timeline of a normal chapter 7 case is 3-4 months as opposed to 3-5 years for a Chapter 13.
The timeline difference also helps explain the next biggest difference between the two chapters: cost. A Chapter 7 will normally be significantly cheaper for the debtor than a Chapter 13. The goal of a Chapter 7 is to release the debtor from their financial obligations, barring any non-dischargeable debts or money owed to the court due to having too much equity in their assets. In a Chapter 13, there are two goals: reorganize the debt and ensure that creditors recover something in the process. When it comes to Chapter 7 vs Chapter 13, attorney fees and court costs are also much higher. If the debtor does not have consistent income, they are probably better off filing a Chapter 7 on account of the cost.
Another difference between the two chapters of bankruptcy is that a debtor has to qualify for Chapter 7. Chapter 7 uses debtor’s income over the previous six months as a baseline to determine whether they qualify for Chapter 7 vs Chapter 13. Bankruptcy Chapter 13 is an option every debtor can choose, regardless of their income.
Chapter 7’s primary purpose is to rid the debtor of their unsecured debt and other debt that is dischargeable. Chapter 13, due to being more concerned with reorganization, has other benefits that can be fruitful to the debtor. A Chapter 13 can toll interest on certain debts that can’t be discharged in a Chapter 7, such as certain back taxes and student loans. In addition, Chapter 13 may modify car loans in “cramdowns”. In a Chapter 7, on the other hand, creditors do not normally adjust their loans.
One difference between Chapter 7 vs 13 is the ability to save your home. In a Chapter 7, a debtor who is behind on their mortgage will have significantly more trouble trying to save their home from foreclosure. The process in a Chapter 7 is too fast for any meaningful modifications or paydowns of arrearages to occur. While filing Chapter 7 will enact the automatic stay, which freezes creditors from collecting, the timeline of the stay is normally no longer than four months. Furthermore, an aggressive creditor can shorten the stay if they understand the laws of bankruptcy.
However, a Chapter 13 is the perfect chapter for a debtor in foreclosure to consider. The Chapter 13 process is a 3-5 year process. This process allows the debtor to enter into a mortgage modification mediation program. This program differs from the normal modification process in that the court monitors the modification. Also, an online portal files all relevant documents. This helps keep the modification process organized.
The modification has a much higher chance of succeeding in a Chapter 13. Normally, the mediation process involved in the mortgage modification mediation will lead to an agreement between both sides. It is impossible for a debtor to do this in a Chapter 7, so most debtors who want to save their homes and are in foreclosure choose to file Chapter 13.
Finally, asset protection strategy differs from Chapter 7 vs 13. In a Chapter 7, a debtor who has assets that have too much equity are going to have to make a difficult choice. They will have to either pay the amount that is non-exempt or surrender the property to the court. If they choose to buy back the asset(s), they will have to pay the sum back in 3-12 months.
If the non-exempt equity is too high, most debtors will be unable to pay it and thus will lose their property. In a Chapter 13, the non-exempt equity amount is added to the amount the debtor has to pay back over the course of 3-5 years. Most debtors may afford to keep these unprotected assets when given an extended period of time.
Every debtor should examine the differences between the two chapters of bankruptcy carefully before filing. Contact an experienced bankruptcy lawyer to learn more about your options.