Examining the Difference Between Chapter 7 & Chapter 13 Bankruptcy

Considering bankruptcy to address your debt problems is a significant decision. As you navigate this process, you may be wondering about the key differences between Chapter 7 and Chapter 13 bankruptcy. This article provides a comprehensive overview of those distinctions, and will allow you to make an informed decision about which option is best suited to your financial circumstances.

With over 40 years of experience and over 5,000 bankruptcies under his belt, Thomas A. Corletta is a trusted, experienced, and tenacious consumer bankruptcy lawyer based in Rochester, NY. 

What Is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is primarily debt repudiation. By filing for Chapter 7 bankruptcy, unsecured obligations such as credit card balances, unsecured loans, medical debts, utility bills, and even some back income taxes more than three years old can be completely eliminated. However, at present, student loans and unpaid child support payments are not eligible for discharge; although there have been charges made to Department of Education regulations to allow certain debtors to apply for a stipulated discharge of student loans subject to Court approval.

Secured debts such as mortgages and car loans remain unaffected unless the property securing the debt is surrendered. In exchange for discharging these obligations, the Bankruptcy Trustee can seize non-exempt assets. Fortunately, both New York and Federal Law allow you to exempt a broad range of personal property. It is crucial to honestly list all assets and seek advice from your attorney regarding which set of exemptions would be most advantageous, and what property may not be exempt. Numerous Debtors may benefit from Chapter 7 bankruptcy without surrendering any personal property, provided they meet the appropriate set of exemptions and honestly disclose all their assets. Failure to engage in full disclosure can have severe consequences, including denial of discharge and possible criminal prosecution.

Debts Discharged by Chapter 7 Bankruptcy

Chapter 7 bankruptcy discharges most non-priority unsecured debts, including credit card balances, medical bills, and unpaid utilities. It can also discharge secured debts, but the debtor must surrender the property securing the loan. Priority debts such as income taxes and child support cannot be discharged, except under limited circumstances.

Qualifying for Chapter 7 Bankruptcy

To qualify for Chapter 7 bankruptcy, an individual’s annual income must be below their state’s median income level, or they must pass a “Means Test” analysis. Those who do not pass the Means Test must file under Chapter 13.

The Discharge Process in Chapter 7 Bankruptcy

After filing under Chapter 7, the Trustee will examine your debts and assets to determine if any assets can be sold to pay your creditors. Debtors can keep exempt assets, but honesty in disclosing all assets is crucial. Eligible debts are discharged at the time of Discharge, but bankruptcy remains on a credit report for 7-10 years, because it is public information.

<h2>What Is Chapter 13 Bankruptcy?</h2>

Chapter 13 bankruptcy is a viable option for those who have fallen behind on secured debts such as mortgages or auto loans and are facing possible foreclosure or repossession, or owe non-dischargeable debts like income or property taxes, or possess assets they could lose in a Chapter 7 bankruptcy.

In Chapter 13, unsecured debts like credit cards are also discharged, but creditors must receive as much as they would have if the debtor had filed under Chapter 7 and the Debtor must use all disposable income. Unsecured creditors typically receive a percentage of what they are owed, ranging from 20% to full payback depending on the circumstances and assets of the Debtor.

Repaying Past Due Amounts with Chapter 13 Bankruptcy

Chapter 13 bankruptcy offers a feasible option, as opposed to surrender, for individuals who are behind on payments for secured debts such as mortgages or auto loans. It allows debtors to repay past due amounts via a Court-Ordered repayment plan with the Chapter 13 Trustee, who must approve it. Usually, payments are made by direct wage deduction, ensuring compliance.

Protection from Foreclosure and Collection Activity

During the repayment process, creditors may not pursue foreclosure or any other collection activity. This ensures debtors can focus on making payments without the constant threat of losing their property. The Court-Ordered repayment plan offers security to debtors, because creditors are bound by the plan and cannot take   collection action.

Current Obligations in Chapter 13 Bankruptcy

Debtors must also continue to pay all current obligations while making payments under the Court-Ordered repayment plan. The plan applies only to “back” obligations, which means that debtors must keep up with their current obligations from their remaining disposable income. Falling behind on current mortgage or car payments can lead to dismissal of the Chapter 13 case and commencement of collection action.

This option provides peace of mind for debtors as they work towards repaying past due amounts. Creditors are bound by the Court-Ordered repayment plan, preventing them from taking any collection action. This allows debtors to focus on making payments and getting back on track with their finances.

Experienced Bankruptcy Attorney in Rochester, NY

When it comes to filing for bankruptcy, it is essential to work with an experienced attorney who can guide you through this complex legal process. With over 40 years of experience, Thomas A. Corletta, Attorney at Law, is the trusted expert you need to get a fresh start. Attorney Corletta has handled thousands of bankruptcy cases for clients throughout Rochester, NY, and the surrounding area. He delivers personal attention and creative solutions to even the most challenging situations. With his in-depth understanding of bankruptcy law, he can help you navigate the process and achieve the best possible result.