Chapter 7 v. Chapter 13 Bankruptcy

What is the Difference Between Chapter 7 & Chapter 13?

Declaring bankruptcy is usually the last option for people who cannot resolve their debts, and the thought of having to go that route can be overwhelming. If you are trying to decide on Chapter 7 vs Chapter 13, New Mexico bankruptcy lawyers at Gilchrist Law Firm, P.C., can provide legal support to help you take control of your finances again.

What Is Bankruptcy?

Bankruptcy is a legal process where people (or businesses) can start over financially when they are having such difficulty that they are not able to repay their debts. This means discharging all or some debts or extending monthly payments under the protection and supervision of the courts.

Liquidation v. Reorganization

If you are just exploring the idea of bankruptcy, it can be overwhelming to know what bankruptcy would work for your situation. Chapter 7 is typically called a liquidation or a “fresh start” bankruptcy. Chapter 13 bankruptcy, on the other hand, is often referred to as a reorganization bankruptcy for individuals.

Both Chapter 7 and Chapter 13 bankruptcies will trigger the automatic stay protection. Once either one is filed, the protection stops creditors from calling or otherwise taking further collection actions.

Chapter 7 Bankruptcy

A Chapter 7 bankruptcy is the most straightforward bankruptcy. If you “pass” the means tests and you do not have any protected (non-exempt) assets, your bankruptcy can be over start to finish in about 4-6 months.

Chapter 7 bankruptcies allow those with certain income and no assets to wipe most of their debts clean. A Chapter 7, similar to a Chapter 13 bankruptcy, will erase most unsecured debt. It will also stop a bank or a finance company from taking any further action to either foreclose on your house or your automobile. Unfortunately, a Chapter 7 cannot help individuals catch up on past due payments. A Chapter 7 is further limited on how it can help individuals with past due tax debts.

If you make over a certain income (it depends on income and household size), then you most likely won’t qualify for a Chapter 7 and will need to consider a Chapter 13 bankruptcy instead.

Chapter 13 Bankruptcy

Unlike Chapter 7, a Chapter 13 is a repayment plan that can last between 3-5 years. In addition, there are more tools available to individuals under Chapter 13. For example, if your house is being foreclosed upon, a Chapter 13 will stop the foreclosure and allow you to catch up on the past due amounts.

In addition, a Chapter 13 can stop automobile repossessions and allow individuals to catch up on the past due payments. In addition, a Chapter 13 bankruptcy can allow you pay on your vehicle only what the vehicle is worth. Many of our clients are underwater with their vehicles, or they owe more on the vehicle than the vehicle is worth. Depending on when the vehicle was purchased, we may be able reduce the amount to pay on the vehicle as well as the interest rate on the vehicle loan.

If you are above the median income for your size household in New Mexico or if you have assets, a Chapter 13 is likely the better option for you.

Comparing Chapter 7 and Chapter 13 Bankruptcy

In general, Chapter 7 is more suitable for straightforward cases, while Chapter 13 is better for more complex bankruptcies. Chapter 13 will give you greater control and flexibility with certain creditors and is beneficial if you have non-exempt assets. However, if you have exempt assets or no significant tangible assets, Chapter 7 will more than likely be a quicker and simpler option.

Converting Chapter 7 to Chapter 13

“Conversion,” in bankruptcy, means switching chapters before the first one is complete. There are two reasons this could happen: changed circumstances and induced conversion.

Voluntary Conversion

Choosing to change your case to Chapter 13 does not happen often, but it could be helpful if there are unexpected changes in your situation. Some reasons to change chapters are:

• Realizing non-exempt assets will be liquidated in Chapter 7, so converting to Chapter 13 will allow you to keep your assets.
• You want to cure defaults since Chapter 13 allows you to catch up on missed mortgage or car payments through a structured repayment plan.
• Switching to Chapter 13 could allow for more debts to be discharged than would be in Chapter 7.

Induced Conversion

Although rare, you could be required to convert from Chapter 7 to Chapter 13, specifically if you are not eligible for Chapter 7, usually due to a mistake on the Chapter 7 means test. The means test calculates whether or not you have the “means” or the ability to pay creditors some of what you owe. If you can afford to do so, you won’t pass the test and need to file for Chapter 13.

Typically, the cases are thrown out or dismissed, and it becomes voluntary as a fallback option to keep bankruptcy protections.

Advantages of Filing for Bankruptcy

Debt Discharge or Debt Repayment Plans

Chapter 7 bankruptcy can clear unsecured debts like credit cards, personal loans, and medical bills, meaning you are no longer legally required to pay these debts. In Chapter 13, you will be able to create a manageable debt repayment plan. Also, you may end up paying less than what you originally owed.

Asset Protection

Chapter 7 filings can allow you to exempt specific assets, like your home, vehicle, retirement accounts, public benefits, and essential personal property, like clothing and furniture, from being sold to pay off creditors.

Ending Annoying and Aggressive Collection Efforts

Upon filing, all collections efforts must stop, meaning aggressive debt collectors will no longer be able to call or send you letters. If they do not abide by this, they can be found in contempt of court and fined for damages.

Get Financially Educated

If you go through bankruptcy, you are required to go through credit counseling and financial management courses. This can equip you with the knowledge and tools to better succeed financially in the future.

Fix Your Credit

Even though your credit score will be lowered when you file, it will lead to improvement as you begin to eliminate debt and rebuild your credit.

Peace of Mind

Filing for bankruptcy and resolving your debts can help take significant stress and anxiety off your shoulders. This will allow you to focus on rebuilding your life after debt.

FAQs

Q: Which Type of Bankruptcy is More Complicated, Chapter 7 or 13?

A: Chapter 13 bankruptcy is generally more complicated than Chapter 7 because, with Chapter 13, the process is longer and requires a repayment plan, stringent financial management, and reporting. Chapter 7 is a more common form of bankruptcy because it is faster, cheaper, and takes out more of your debt.

Q: How Will Bankruptcy Affect My Credit Score?

A: Filing for bankruptcy will most likely impact your credit score negatively, especially initially once you file. With Chapter 7, the mark will remain on your credit report for up to 10 years from the filing date and up to 7 years for Chapter 13. However, as you begin making timely payments and taking other actions to build your credit, your credit score will recover over time.

Q: Is it Better to File Chapter 7 or Chapter 13?

A: There is no one-size-fits-all answer to which one is better. The type of bankruptcy that will be better for your situation depends on your circumstances and finances. We recommend you consult with an experienced bankruptcy attorney who can provide personalized advice and help you determine which is the most effective option for your situation.

Q: What Is the Biggest Difference Between Chapter 7 and Chapter 13 Bankruptcy?

A: The biggest difference between Chapter 7 and Chapter 13 bankruptcy is that the focus of Chapter 7 is on getting rid of unsecured debt, while Chapter 13 allows you to get caught up on secured debts such as your car or home at the same time you get rid of unsecured debt. Chapter 7 is quicker than Chapter 13, taking three to six months instead of Chapter 13’s three to five years.

Q: What Type of Bankruptcy Is Better for Stopping Foreclosure?

A: Chapter 13 bankruptcy is typically the better option for stopping foreclosure, especially if your goal is to keep your home. Chapter 13 will halt foreclosure proceedings and allow you to come up with a repayment plan to catch up on mortgage payments. You might consider Chapter 7 if you can no longer afford your home.

Discuss Your Bankruptcy Options With an Albuquerque Bankruptcy Lawyer

If you are interested in learning more, especially about what type of bankruptcy would work for your situation,  you can enter your information in the Contact Us section or start your free case evaluation by submitting this form.