Please explain the difference between Chapter 7 and a Chapter 13.
The first difference is who qualifies.
There are two ways to qualify for the remedy of Chapter 7. First, your income must be at or below median level income (an adjustable figure determined by where you reside). If your income is too high then the second way to qualify is a math formula; deduct allowable expenses (expenses and amounts approved as allowable, such as food, clothing, medical expenses, rent, utilities, insurance and secured debts such as for a home or vehicle) from your total household income and if there is not enough disposable income (the amount left over after you subtract expenses from income) and you do not have enough to pay 25% of the total of your unsecured debt over 60 months.
To be qualified for the remedy of Chapter 13 you must be an individual with regular monthly income sufficient to pay at least your non-dischargeable and priority debts over a 60 month period of time. Also, as of April 2016, your unsecured debt must not exceed $394,725 and your secured debt must not exceed $1,184,200. If your debt exceeds these limits, my office will still help you obtain bankruptcy relief by filing a reorganizing Chapter 11 bankruptcy. Please note the costs and work involved is very different with a Chapter 11.
It helps to understand who the parties are in a bankruptcy. There is you, your assets (which are the ‘bankruptcy estate’), your creditors, the Bankruptcy Court and the Bankruptcy Trustee.
To keep your assets you must ‘exempt’ them from the ‘bankruptcy estate’. To do this you apply exemption codes to your equity in the assets. Once applied the asset is protected. Certain assets have specific exemption codes, such as the vehicle exemption, the homestead exemption, the exemption for household goods and so on. In California, you have two sets of exemption codes and you may choose to use one or the other. You may not pick and choose from both of the codes; you must choose one or the other. For instance, if you have a lot of equity in your home you would choose the 704 exemption code with the high homestead exemption. This section does protect your money in the bank, except social security, from the ‘bankruptcy estate’ and has a smaller amount to protect the equity in your vehicle than the other code section. The other code section, 703, has the ‘wildcard’ exemption, which most people use if they do not have a lot of equity in their home or they do not have a home. The term ‘wildcard’ means you can use the exemption to protect any legal asset. It is wise to seek the counsel of an experienced bankruptcy attorney if you have assets, otherwise, you may find your assets are taken and the proceeds used to pay your creditors. Not the result you expected when filing for relief.
Next, the remedies are very different.
Chapter 7 is a very quick ‘liquidating bankruptcy’. The Chapter 7 Trustee sells non-exempt assets and distributes the proceeds to your creditors. If you have assets that are non-exempt you want to keep you may want to file a Chapter 13. If you elect to do a Chapter 7 with non-exempt assets, our office will file ‘proofs of claims’ with the court for any of your priority debts, so they will be paid first and enhance your fresh start.
Chapter 13 is a reorganizing bankruptcy that lasts from 3 to 5 years. A chapter 13 plan can cure the default on your home or vehicle; can stop the penalties and interest accruing on tax debt; allow for a payment arrangement on domestic support obligations and strip a completely unsecured mortgage. I remember one very difficult case where a Father, who was under the influence at the time the Mothers of his Children became pregnant, later straightened out his life and became a responsible Father, but was saddled with so much domestic support debt to the Mothers and the State of California, that he could not afford to spend time with his Children. Through negotiations, Child Support Services agreed to accept less than 100% payment during his Chapter 13 Plan. Although the Father still had past-due support due after completing his 5-year plan, the amount of the debt he paid during the 5 years of his chapter 13 bankruptcy made the payment of the balance of the debt, after bankruptcy, doable.
Chapter 7 and 13 allows you to strip judicial liens from your home or personal property. A soon to be a single father and business owner, struggling in these perilous economic times, was sued by 7 different unsecured creditors. The creditors obtained default judgments they converted into liens on his home. There was not enough equity for all of the liens to attach to his home. My office challenged the liens and 6 of the liens were discharged.
When home values are down my office has helped many homeowners strip a completely unsecured second mortgage with a Chapter 13. This means there is no equity in the home for the loan to attach to.
Stripping liens is not a remedy for procrastinators. One couple came to see me when the housing market was down and waited two years to file, by the time they finally decided to file, the housing market had turned around and there was equity in their home for some of the tax liens to attach to. Their tax debt was reduced not eliminated. The dread of filing a bankruptcy is understandable but if the remedy helps, it is best to seize the remedy.
The timing is different between a Chapter 7 and Chapter 13.
A no-asset chapter 7 is usually around 6 months from the filing date to the discharge date. An asset chapter 7 is longer because the Bankruptcy Trustee must follow procedures to sell the assets and pay the creditors. An asset chapter 7 bankruptcy means that the Debtor has assets that are not protected from the estate by exemptions.
Some of our clients have equity in their car and not enough exemptions to cover the value of their vehicle. Our clients in the Real Estate Business and Construction are able to use the ‘tools of the trade’ exemption along with their vehicle exemption but how about people that just need their vehicle to go back and forth to work or take children to school or run errands like going to the doctors, grocery store or other necessary places? If they file bankruptcy will they lose their car? This seems like a punishment to clients who prudently paid off their car loans.
The Bankruptcy Code and Case Law require the Debtor to list all of their assets and the value of the asset. Many assets are listed at replacement value but the value for cars is the Kelly Blue Book or NADA Retail value of the vehicle. When there are not enough exemptions to protect the full value of the vehicle the Trustee is required to seize and sell the vehicle. Distribution of the Sale Proceeds gives the Debtor whatever amount they were able to exempt, pays the Trustee for his/her efforts and distributes the rest to the unsecured creditors. Often the exemption amount is not enough to buy a new vehicle. Our office has worked out money settlements with the Trustees for many of our clients so they can keep their car.
Chapter 13 is a reorganization for 3 to 5 years; shorter if you pay your creditors 100%. If you qualify for a Chapter 7 and opt for the Chapter 13, then you may have a 3-year plan. If the monthly plan payment more than you can afford then you may lower the plan payment and have up to 5 years. This is helpful when a client needs to save a home or a vehicle and does not have enough disposable income to pay the plan in 3 years.
Some may need a ‘chapter 21’. This is a great remedy for people whose income qualifies them for a chapter 7 and they have priority debts that won’t be discharged. In chapter 7, they discharge all of their unsecured debt. Chapter 13 is a payment plan for their non-dischargeable and priority debt. The chapter 13 bankruptcy is on the heels of the chapter 7 discharge so the Bankruptcy rules prohibit the second discharge when the cases are filed closely together. The remedy the second bankruptcy offers, the chapter 13, is the remedy of a reasonable payment plan. It allows the debtor to maintain a minimal lifestyle while paying the debt. Yes, there is a light at the end of the tunnel.