What Is the Difference Between Chapter 7 And Chapter 13?
If you are struggling with bills that you cannot pay, you may be considering filing for bankruptcy relief. Like most people who want to file for bankruptcy in Florida, you have questions about what chapter of bankruptcy to file. Most individuals who file for bankruptcy relief in the United States file a case under Chapter 7 or Chapter 13 of the Bankruptcy Code. A Daytona bankruptcy law firm can help you determine which chapter of bankruptcy offers you the best benefits of bankruptcy.
Both chapters of bankruptcy offer debt relief, protection from creditors, and protection for certain assets. However, there are very important differences between Chapter 7 and Chapter 13 that can make a significant difference in your bankruptcy case. Our Daytona bankruptcy lawyer will analyze your financial situation and explain whether a Chapter 13 or Chapter 7 case is best for you during a free bankruptcy consultation. Call (888) 316-2131 no to talk to a Daytona Beach bankruptcy attorney for free!
Major Differences Between Chapter 13 and Chapter 7 Bankruptcy Cases in Florida
Below are some of the critical differences between the chapters of bankruptcy that could have an impact on your case. Because some of these differences could determine whether you keep certain assets or significantly reduce secured debts, it is extremely important to work with an experienced Daytona bankruptcy attorney when choosing which type of bankruptcy case to file.
Let's look at some of the most significant differences between the chapters:
• Income Eligibility Restrictions
Before you can file under Chapter 7, you must meet the income restrictions of the Chapter 7 Means Test. The Means Test compares your average current monthly income to the income of households in your area of the same size. If your income exceeds the median income, you “fail” the test. However, that is not the end.
The second portion of the test allows you to deduct certain expenses from your income to calculate your disposable income. Disposable income is income that you have available after paying certain living expenses each monthto pay toward your debts. If your disposable income is below the maximum limit for a Chapter 7 case, you can proceed under Chapter 7. However, if your disposable income is sufficient to fund a Chapter 13 plan, you should file under Chapter 13. If you proceed under Chapter 7 after “failing” the means test, your discharge will likely be denied unless you fall within very narrow and restrictive exceptions.
• Liquidation of Assets
A Chapter 7 case is referred to as a “liquidation bankruptcy” because the Chapter 7 trustee can sell the nonexempt property to pay unsecured creditors. Property that is “exempt” is not sold in a Chapter 7 case. However, if you have property with equity that exceeds the Florida bankruptcy exemptions, the trustee can take the property from you. In Florida, most Chapter 7 cases are “no asset” cases meaning that the debtor retains all property while eliminating most or all unsecured debts.
In contrast, debtors in a Chapter 13 case do not lose any property unless they choose to surrender property to a secured creditor voluntarily. However, debtors must pay unsecured creditors an amount that is equal to the nonexempt value of any assets that exceed the Florida bankruptcy exemptions. Therefore, people who have assets with substantial equity can protect those assets from creditors by filing a Chapter 13 bankruptcy case.
• Length of the Bankruptcy Case
In a typical no-asset Chapter 7 case, a debtor receives a discharge,and the case is closed within four to six months after filing the bankruptcy petition. However, a Chapter 13 case remains open until all payments are made under the bankruptcy repayment plan. Therefore, a Chapter 13 case typically takes between three to five years to complete.
• Cramdowns and Lien Stripping
Cramdowns and lien stripping are not permitted under Chapter 7. If a debtor cannot afford the payments on a secured debt (i.e. mortgage or car loan), the debtor must surrender the property to the secured creditor. The good news is that when a Chapter 7 debtor surrenders collateral, the creditor cannot take any action to collect any money that is not paid after the collateral is liquidated.
However, cramdowns and lien stripping are permitted in a Chapter 13 bankruptcy plan. In a cramdown, the debtor proposes to reduce the principal loan balance on a secured debt to an amount equal to the value of the property. For example, if you owe $10,000 for a loan secured by your car, but your car is worth $5,000, you may be permitted to reduce the balance of the loan to $5,000. The remaining $5,000 owed to the creditor become unsecured debt and receives pennies on the dollar to cancel the debt.
Lien stripping applies to junior liens on real estate. If you have a second mortgage, you may be able to value the mortgage at zero in your bankruptcy plan if your home is worth less than you owe to the first mortgage company. When a debtor successfully values a second or subsequent mortgage at zero, the amount owed to the creditor becomes an unsecured debt.
Therefore, the creditor receives pennies on the dollar to satisfy the debt. The lien on the home is canceled upon completion of the bankruptcy case. Cramdowns and lien stripping are extremely useful tools for debtors who owe more on their homes and vehicles than the property is worth.
• Bankruptcy Repayment Plan
In a Chapter 7 case, a debtor does not propose a bankruptcy repayment plan because the debtor lacks the disposable income to fund the plan. If the trustee does not find any nonexempt property to liquidate, the debtor keeps his property and gets rid of unsecured debts.
However, a Chapter 13 debtor must propose a bankruptcy repayment plan. A repayment plan provides details of how the debtor intends to reorganize debt to pay creditors. The calculation of a Chapter 13 plan can be complex. Our experienced Volusia County bankruptcy attorney has experience calculating Chapter 13 plans to arrive at the lowest monthly payment allowed by law.
It is important to remember that debtors in Chapter 13 rarely pay 100 percent of their unsecured debts. In most cases, debtors pay a very small percentage to unsecured creditors. Therefore, you could get rid of thousands of dollars in debt for just pennies on the dollar.
Call a Florida Bankruptcy Attorney in Daytona
The above information is a general discussion of some of the differences between Chapter 7 and Chapter 13. Our Daytona bankruptcy lawyers offer free bankruptcy consultations so that you can discuss your unique financial situation to receive advice that specifically relates to your case. We help individuals, couples, and companies throughout Volusia County get rid of debt through bankruptcy. Call (888) 316-2131 to learn how you can get out of debt.