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Chapter 7 vs. Chapter 13 Bankruptcy

Bankruptcy petition for individuals with gavel.

If you are dealing with individual debt–credit cards, student loans, medical bills, etc.–you may come to the point where filing for bankruptcy is your best option. The vast majority of individual bankruptcy debtors file under Chapter 7 or Chapter 13. Whether you are better off under Chapter 7 or Chapter 13 depends upon your financial circumstances, the nature of your debt, and other factors. Read on to learn about the differences between Chapter 7 and Chapter 13 bankruptcy. If you are dealing with mounting debt and considering bankruptcy in Southern California, talk to a professional Ventura debt relief and bankruptcy attorney at Rounds & Sutter for advice and representation.

Chapter 7
When we refer to a “Chapter 7” or “Chapter 13” bankruptcy, we’re talking about bankruptcies filed under a specific Chapter of the Bankruptcy Code. Different chapters are appropriate for different types of debtors. Some are meant for businesses, some for individuals, and some for special debtors such as foreign entities.

Chapter 7, known as “liquidation bankruptcy” or “straight bankruptcy,” is a form of bankruptcy geared toward individual debtors with limited disposable income. Chapter 7 primarily discharges unsecured debts such as credit cards and medical bills. In a Chapter 7 bankruptcy, the bankruptcy trustee assigned by the court determines if there are any non-exempt assets subject to sale in order to pay off as much of your covered debt as possible.

But, not all assets are subject to sale in Chapter 7. The Code includes exemptions for certain types of assets. In fact, with help from a seasoned bankruptcy lawyer, most debtors can protect many, if not most or all of their treasured assets from sale. The goal of the attorneys at Rounds & Sutter LLP is to find ways the client will discharge their debts while retaining all their assets.

Chapter 7 is only available for debtors below a certain income threshold. To qualify, debtors must satisfy the “means test.” If the debtor’s income is below the state median for a household of their size, they automatically qualify. If their income is above the median, the debtor can undergo a more involved test, using their expenses to offset their income. If the final tally is below the threshold, the debtor can file under Chapter 7. Debtors with higher income, however, can look to Chapter 13.

Chapter 13

Unlike Chapter 7, Chapter 13 does not involve the liquidation of any assets. Instead, the debtor, the creditors, and the trustee will work to consolidate covered debt into a single repayment plan. The debtor gets a time buffer on past-due debts, stopping the accrual of interest and late fees. The parties will establish a plan to repay the covered debt over a set period of time–typically three or five years–at the end of which any remaining covered debt will be discharged.

Chapter 13 is meant for debtors who have disposable monthly income and/or have secured assets in which they are behind on payments and need additional time to catch up (i.e., foreclosure on the family home). Chapter 13 gives you this additional time at a reduced payment spread out over years. So long as the debtor can meet their new, reduced monthly obligation, they can continue with the plan and benefit from the discharge of debt at the end.

Eligibility for Chapter 13 depends on several factors including household income, the nature and amount of the outstanding debts, and others. The debtor will need to be able to demonstrate that they earn enough to repay a portion of the outstanding debt each month in accordance with a repayment plan.

Talk to an experienced debt relief and bankruptcy attorney to discuss your bankruptcy options and find the best fit for you.

Find Financial Independence With Help From a Seasoned Southern California Bankruptcy and Debt Relief Attorney

If you are dealing with mounting debt and considering debt relief options including bankruptcy, please contact Rounds & Sutter for a free, confidential consultation. With offices in Ventura and Westlake Village, we represent clients throughout Southern California, offering trusted legal counsel in the face of life’s challenges.