Golden State Law Group

What is a Chapter 7 Bankruptcy?

A Chapter 7 bankruptcy is the most common type of bankruptcy and is often referred to as a "fresh start" bankruptcy.   In a Chapter 7, a Chapter 7 trustee is appointed to the case. The trustee's duties include marshaling non-exempt property of the debtor, if any, selling that property for the benefit of creditors, and eventually distributing sale proceeds to creditors. The debtor usually receives at the close of the case a discharge (foregiveness) of the debts.  In a Chapter 7 there are no debt ceiling limits that cannot be discharged.  All exempt assets of the debtor (determined by federal and state exemption statutes) will ultimately be retained by the debtor after the bankruptcy. Typical examples of assets (property) you usually can keep are your home (subject to payment of the mortgage(s) and the amount of equity in the property), your motor vehicles (to the extent allowed by law), personal assets such as clothing, furniture, furnishings and appliances, whole life insurance policies subject to certain limits, and your retirement plans such as a 401(k) and IRAs.  This is not an exhaustive or all-inclusive list of assets you may be able to keep. You may have assets not listed here that may also be capable of being deemed exempt.

In the majority of Chapter 7 bankruptcies, most, if not all assets are exempt (protected) from loss to creditors. This outcome is typical but each case can vary depending on the facts of the debtor's case.  In some cases not all of the debtor's assets can be fully protected.

Certain debts are NOT dischargeable, namely, recent income taxes, student loans, alimony and child support, criminal and civil fines, court ordered restitution, and debts incurred pursuant to fraud or intentional wrongdoing.

The Chapter 7 process usually takes approximately 100 days to be completed from the filing of the Chapter 7 petition to the debtor's discharge and closing of the case.

What is a Chapter 13 Bankruptcy?

A Chapter 13 bankruptcy, often referred to as a wage-earner plan or reorganization of the debtor, differs greatly from the Chapter 7 liquidation.  In a Chapter 13 if the debtor has regular income (usually earnings and wages) and unsecured debt of less than $336,900 and secured debt equal to or less than $1,010,650, the debtor qualifies to repay a portion of his/her debt in a Chapter 13 Plan.  The percentage of the debt the debtor will pay will depend on several factors, but typically include propertie(s) owned and their equity, disposable income (money left over after your pay your monthly necessities such as mortgage payments, utilities, food, car payments, etc.)  The greater disposable income you have left over, usually the larger your monthly plan payment.  A Chapter 13 Plan payment in terms of the total percentage of debt you must pay can vary from 10% to 100%.  A Chapter 13 Trustee is appointed to your case.  Their duties are to receive your monthly plan payments and distribute the pro-rata share to each of your creditors.  Unlike a Chapter 7,  a Chapter 13 Plan of repayment usually takes 3 to 5 years  to complete.  The Chapter 13 debtor, upon completing all Chapter 13 Plan payments, receives a discharge of any unpaid portion of debt not paid to creditors through the plan.

There are many reasons why a debtor may choose to file a Chapter 13 bankruptcy. One of the more typical situations that prompt the debtor to file for Chapter 13 is where the debtor has significant disposable income left after paying monthly necessities and therefore does not qualify for Chapter 7.

Another example might be where the debtor wishes to keep his home but has fallen behind on the mortgage payments.  In a Chapter 7 the debtor would have to bring his mortgage payments current in order to keep his home from being foreclosed.  In a Chapter 13 the debtor must pay his regular monthly mortgage payments timely following the filing of the case, but is afforded the opportunity and benefit of paying back any mortgage arrearages over 36 to 60 months through the Chapter 13 Plan.  The same can apply to those who have fallen behind on their car payments and wish to keep them without fear of repossession.

Also, Chapter 13 may help some creditors discharge what they could not in a Chapter 7.  Often debts such as criminal fines and debt incurred by fraud can be discharged in a Chapter 13.