Deciding Between a Chapter 7 and a Chapter 13 Bankruptcy Filing
If you’ve concluded that the best (or only) way out of your current financial predicament is to seek protection in bankruptcy, your next step is to determine which direction you want to go. You’ve heard references to “Chapter 7” and “Chapter 13,” but you may not know what these terms mean and what the basic differences between them are.
What Happens to Your Debt?
In both a Chapter 7 and a Chapter 13 you will receive a discharge of your debts. The primary difference is what source creditors can look to for possible repayment.
In a Chapter 7, creditors can only be paid from your current assets – they do not have a right to be paid from your future income. However, in Chapter 7 the person filing for Chapter 7 protection can protect (“exempt” in bankruptcy lingo) their assets up to certain limits. In New Jersey and Pennsylvania these limits are generous and as a result, most people who file a Chapter 7 keep all of their assets, discharge their debts, and do not have to make payments to their creditors. A Chapter 7 discharge of debt typically takes place 100 to 120 days after the Chapter 7 case is filed.
In a Chapter 13, creditors are typically repaid only from the future income of the person who files (i.e. monthly payments). The money paid each month is paid to the Chapter 13 trustee and not to each individual creditor. A Chapter 13 case can last between 36 and 60 months.
There are two primary types of Chapter 13 cases, as determined by what the goal of the Chapter 13 case is. The first type of Chapter 13 case is a “cure and reinstate” plan, where the person filing for bankruptcy has fallen behind on mortgage payments, car payments, or IRS tax payments and needs to impose a repayment plan on their creditors. In these types of plans, the person filing for Chapter 13 makes a monthly payment to a Chapter 13 Trustee who channels this money to the appropriate creditor. Some of the money paid will also go to their other creditors such as credit card and medical creditors. At the end of the Chapter 13 case (which can be as short as 36 months or as long as 60 months), the unpaid amounts on remaining debts will be wiped out.
The second type of Chapter 13 case is a case where the person looking to file for bankruptcy is ineligible to file a Chapter 7 case. Roughly speaking, this is because they “make too much money” to wipe out their debts without at least paying a portion of those debts back to their creditors. In these cases the person filing for bankruptcy must pay their monthly disposable income to their creditors for 60 months. At the end of the Chapter 13 case the unpaid balances are discharged. Even in this kind of case creditors are only paid a fraction of what they are owed.
Contact John Hargrave and Associates
We have provided comprehensive counsel to individuals in and around Barrington, New Jersey, since 1977. To schedule a free initial consultation, contact our office by e-mail or call us at 856-547-6500.