Which Chapter to File?

Every bankruptcy is different. An experienced Los Angeles bankruptcy attorney can tell you which type of bankruptcy is best for your specific financial situation. However, there are some general principles that may give you guidance on which chapter to file in your case.

Chapter 7 and Chapter 13 are the most common forms of bankruptcy for most individuals, so the choice will often be between those two options. First and foremost, to be eligible for Chapter 7 bankruptcy, you must have income that is not so high as to cause you not to pass the “means test.” If you do not pass the means test, you may be able to file for Chapter 13, assuming you have the income to stick to a debt repayment plan.

Chapter 7 Bankruptcy

One reason some filers prefer to file for Chapter 7 rather than Chapter 13 is because it does not require you to pay back any of your unsecured debts, and it is a much faster process than Chapter 13. Chapter 7 may take 3-6 months as opposed to the 3-5 years that Chapter 13 bankruptcy takes. The speed of the Chapter 7 process means it can alleviate financial stress very quickly. If you don’t have steady income or employment, you are better off filing under Chapter 7. However, once completed, a Chapter 13 will generally look better on your credit report.

While you can protect certain assets in a Chapter 7 bankruptcy, the amount of equity in the assets that may be protected is mostly limited to those basic necessities you will need to make a fresh start. The trustee’s goal in Chapter 7 is to make sure your creditors get paid back as much as liquidation of your nonexempt assets allow. This means that if you file a Chapter 7 but have assets which are worth more than the law will allow you to exempt, those assets may be subject to sale by your Chapter 7 trustee. Those who do not own their home or other significant assets and who do not have a significant income with which to repay their debts may not be as concerned about the impact Chapter 7 has on property over a certain amount.

However, this does not mean that all homeowners must automatically file for Chapter 13. The determinative factor is the amount of equity in your home. Only when the amount of equity is too large must a person be cautious when deciding to file their case as a Chapter 7. Nevertheless, this would be a perfect example of the type of “problem” you want to have, since it means that you have a lot of equity in your home, which is a good thing. You then need to be cautious so that you make sure that equity is properly protected. Basically, a Chapter 7 is the wiser choice for those with substantial debt, but little property to protect, and a low income.

Chapter 13 Bankruptcy

Filing under Chapter 13 may be your only option if you fail the means test, but it requires you to have a stable income and a willingness to make regular payments to a trustee. The amount of your monthly payment will depend on your income. If done correctly, the payment should always be an affordable payment, since it is based on your disposable income (your “extra income”), which is basically the difference between your monthly income and expenses). Chapter 13 debt repayment plans must be completed in three years, or five years under special circumstances.

In order to get the plan confirmed, all or nearly all of your disposable income must be used to pay your creditors. Your plan must account for payment to all types of creditors. The sum that you must pay to non-priority unsecured creditors is based on what you’re able to pay as well as the value of those assets you were not able to exempt using either System 1 or 2. Chapter 13 is a better choice for people who are willing to stick to the plan for the full 3-5 years and who have a steady income with which to do it.

There are instances where even those who are eligible for Chapter 7 bankruptcy may be better off filing for Chapter 13, because Chapter 13 provides many more tools and advantages to debtors than Chapter 7 does. For example, Chapter 13 allows you to make up missed payments on your mortgage or car so that you can keep these possessions. Similarly, if you have a number of non-dischargeable debts like student loans or back alimony payments that will not be discharged in Chapter 7, you may be better off paying them over time under Chapter 13.

Chapter 13 is also better for those who hope to keep all of their nonexempt property. Whereas in Chapter 7 bankruptcy, your nonexempt property will be sold and the proceeds distributed by the trustee, Chapter 13 may allow you to keep all of your property.

An experienced Los Angeles bankruptcy attorney can take a close look at your situation, including your goals, and give you good advice on how to achieve them through bankruptcy. Contact Devin Sawdayi at 310-475-9399 or via our online form for help with this process.