Chapter 7 or Chapter 13?

By Joseph M. Wilson, Jr., Attorney at Law

We recently wrote a blog post on things to consider before you file for bankruptcy. If you are considering bankruptcy, you may have questions about the “chapter” under which you would file your petition. Businesses typically file a petition to reorganize under Chapter 11. This allows them to restructure their debt and continue operating. Most individuals who file for bankruptcy will file under Chapter 7 or Chapter 13 (family farmers may file under Chapter 12). The answer to this question depends upon your income, assets and liabilities; your bankruptcy attorney will work with you to determine the proper Chapter.

Before you can file for bankruptcy, you are required to complete a credit counseling course through an approved agency. You must also submit complete and detailed listings of all your assets and liabilities. In addition, you must document your recent income. In short, should you file bankruptcy, your financial situation becomes a book that is open to the court.

Chapter 13 Bankruptcy

If you have regular income, you will most likely file for bankruptcy protection under Chapter 13. Once the petition is filed, all creditors listed will be notified of the bankruptcy. At this point, they are prevented from contacting you directly about the debt or filing suit against you to collect the debt; instead, they are given instructions on how to file a claim with the court confirming the amount of debt, whether or not it is secured, and where payments (if any) should be sent.

In the meantime, a plan to repay your secured debt and some or all of your unsecured debt must be filed with the court within 15 days of submitting the bankruptcy petition. This plan must pay off the past due amount on the secured debt and normally includes repayment of at least a percentage of the unsecured debt over a period of no longer than five years. The percentage to be paid to unsecured creditors is determined by a “means” test.  This “means” test calculates your disposable monthly income.  The disposable monthly income is the amount to be paid monthly to your unsecured creditors. Once the payment plan is completed in full, any remaining unsecured debts are discharged, meaning you have no legal obligation to repay the additional monies and the creditor must write the amount off as a loss.

Chapter 7 Bankruptcy

In a Chapter 7 bankruptcy petition, the financial data submitted by the individual will be reviewed and put to a “means” test just like in a Chapter 13. Filing under a Chapter 7 is normally approved when the individual has no means to repay the debt owed and the disposable monthly income from the “means” test is a negative number. As in the case of a Chapter 13, creditors are notified of the filing and must cease all contact and/or legal action. They may also choose to file a claim in the case to prove the debt owed.

In a Chapter 7, you are allowed to own a certain amount of assets, however, if the asset(s) exceed the amount allowed, you would have to either (a) Surrender the asset to the Trustee and the Trustee would sell the asset and the proceeds are distributed amongst your creditors, or (b) You can pay the unprotected value of the asset(s) to the Trustee therefore protecting the asset from liquidation.  If the sale of any unprotected assets is required, once the sale of those assets is completed, a discharge is granted.  To determine if your assets are exempt from liquidation, consult with a bankruptcy attorney.

If you are not sure whether bankruptcy is right for your situation, you may either call us at 1.888.802.3423 to learn more or click here to fill out a short Bankruptcy Inquiry form.

We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.

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