| Q. I’m in major financial trouble and I think I need to file bankruptcy but I need to know what the difference is between a chapter 7 bankruptcy and a chapter 13 bankruptcy, can you explain that |
| A. Bankruptcy filing provides government protection allowing debtors to discharge some or all of their obligations and restart their lives rather than remain overburdened with debt for the rest of their lives. Chapter 7 and chapter 13 operate very differently, which bankruptcy chapter best serves your needs depends on your goals, financial problems and other personal circumstances. |
| Q. How would I decide on a chapter 7 bankruptcy vs. a chapter 13 bankruptcy? |
| A. People should first look at what they hope to achieve by filing bankruptcy and then examine, assuming things all go their way, whether a chapter 7 or a chapter 13 provides the protections and benefits they desire. |
| Q. I would say the goal of the debtor revolves around the discharge of debt, which chapter does that? |
| A. While both chapter 13 and chapter 7 provide some ability to discharge debt, we must now start to differentiate secured debt from unsecured debt. Let’s start with mortgage debt as an example of secured debt and use stopping a mortgage foreclosure as a goal. |
| Q. How exactly does a bankruptcy stop a foreclosure? |
| A. When you file any bankruptcy, either a chapter 7 or a chapter 13, the bankruptcy filing triggers an automatic “stay” of litigation. That means all court actions, including foreclosures, must stop in their tracks and no new litigation may start without the permission of the bankruptcy court. |
| Q. When do you need to file a bankruptcy for the automatic stay to stop a foreclosure? |
| A. So long as the auctioneer gets word about the bankruptcy and the bankruptcy docket number before the final gavel of the auction falls the foreclosure must stop, but a minute after the sale the opportunity has passed. Therefore, one cannot stress enough that to avoid a mortgage foreclosure the bankruptcy must be filed before the auction. The last conversation you ever want to be a part of involves explaining that a person lost any realistic chance to save their home, but if they had only filed a bankruptcy the day before it would have easily protected their house. |
| Q. I thought if I filed bankruptcy I would lose my house because all assets get turned over to the trustee, how can I file bankruptcy and keep my house? |
| A. This illustrates a primary difference of a chapter 7 vs. chapter 13. In a chapter 13 bankruptcy the debtor puts together a reorganization plan, and if completed they keep the house. A debtor filing a chapter 7 will find it much more difficult to keep the home. |
| Q. Can you ever keep the house in a chapter 7 bankruptcy? |
| A. Most times I see people keep their home in a chapter 7 bankruptcy they came into the bankruptcy with current mortgage payments. |
| Q. So for someone already in foreclosure a chapter 13 bankruptcy provides the best bet to save a house? |
| A. I would say for a person even a few months behind on their mortgage whose goal includes home retention chapter 13 offers the only bankruptcy option. |
| Q. So a chapter 7 should never be the bankruptcy of choice for a person in foreclosure? |
| A. Not if they want to keep the house, on the other hand if they could never make a chapter 13 reorganization plan work, a chapter 7 provides the ability to avoid a mortgage deficiency. |
| Q. Does chapter 13 work to protect other secured assets too? |
| A. It can, automobiles or other secured assets included in a reorganization plan can be preserved too. |
| Q. Who wins the chapter 13 vs. chapter 7 battle if all your debt falls into the unsecured category like credit card debt? |
| A. For people with only unsecured debt that need a bankruptcy I almost always suggest chapter 7 over chapter 13 as long as the court allows a chapter 7 filing. |
| Q. When would a court not permit a debtor to file a chapter 7? |
| A. When their income exceeds chapter 7 guidelines. |
| Q. What court rules might stop someone from filing a chapter 13? |
| A. Only people may file a chapter 13 bankruptcy, not corporations, and individual’s unsecured debt may not exceed $336,900 nor can their secured debt be more than $1,010,650. |
| Q. Can a person change from a chapter 13 to a chapter 7 once they have filed the initial bankruptcy? |
| A. Yes, with court permission. |
| Q. Does a chapter 7 or a chapter 13 make my credit score worse? |
| A. I suppose a chapter 7 if forced to choose, but the better answer would be explaining that either represents a major black mark on your credit report so bad that exactly how bad becomes irrelevant, and what you do to rebuild your credit means much more. In terms of improving credit after bankruptcy a difference between chapter 7 and chapter 13 comes from the fact that a chapter 13 stays on your credit report for 7 years while chapter 7 remains on your credit report for 10 years. |
| Q. Does a chapter 7 or a chapter 13 cost more in terms of court and legal fees? |
| A. The chapter 13 costs more, but questions like does a chapter 7 vs. chapter 13 cost more or which makes credit worse should not rank as major reasons to file one bankruptcy chapter over another. |
| Q. So to sum up chapter 7 vs. chapter 13 - a person with a mortgage and a home who qualifies for chapter 13 should file chapter 13 if they want to keep the asset and someone with unsecured debt and no non exempt assets should file a chapter 7? |
| A. Anyone serious about bankruptcy should talk to a bankruptcy lawyer, but as a basic understanding that provides a good start. |
