Chapter 7 bankruptcy is what most people are referring to when casually speaking about bankruptcy, it is also the most common form of bankruptcy. Generally a clients decide to file Chapter 7 when their assets (those they wish to keep) fall within the available exemptions and they are able to eliminate their unsecured debts entirely within a matter of months (generally 3-4 months).
Chapter 13 bankruptcy involves a plan of reorganization of debts and a structure (but limited) repayment plan. The repayment generally excludes a large portion of unsecured debts (which are eventually wiped out). The percentage of unsecured debt that must be repaid is a result of your overall economic situation and the specifics of the repayment plan your attorney submits to the court. This plan is the result of a detailed analysis of your income, expenses and ability to repay.
Generally a party who qualifies for a Chapter 7 bankruptcy will choose to file Chapter 7. However, there are a few exceptions, including situations where:
- You have been through a divorce and want to discharge obligations (other than spousal, child and family support) imposed by the family law proceedings.
- You desire to reorganize a vehicle loan (generally to obtain a lower payment and/or lower the interest rate) or elect to “cramdown” an older vehicle loan which exceeds the vehicles value.
- You are facing IRS garnishment or asset seizure(s). In these cases a Chapter 13 can allow you to pay back the tax debt over a 5-year period rather than deal with garnishment and seizure(s).
- It appears the Chapter 7 trustee will attempt to liquidate one (or multiple) assets which you desire to keep. –There are no liquidation in Chapter 13
As highlighted above, a Chapter 7 Bankruptcy involves the possibility of liquidation of assets. However, liquidation only occurs where those assets do not fall within the exemptions available in California. If a liquidation event is possible and needs to be avoided it is important to discuss Chapter 13 as an alternative to a Chapter 7.
Out advice, once faced with the decision to file Bankruptcy is to keep an open mind and allow your attorney to examine your financial situation and work with you to devise a plan, including which Chapter (7 or 13) will benefit your situation the most.
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