Chapter 7 vs Chapter 13

A Chapter 7 Bankruptcy is a traditional bankruptcy. In a Chapter 7 bankruptcy, we file court papers listing all your debts. The court then orders that your debts are Discharged. By “Discharged” we mean that your debts don’t exist anymore – you don’t owe them. (Certain debts, by law, may not be discharged, such as most taxes, child support, etc.) The Chapter 7 process is relatively inexpensive and takes a few months to complete.

A Chapter 13 is very different from a Chapter 7. In a Chapter 13 Bankruptcy you pay a portion of your debts for several years. Then when that time period is over your balances are Discharged.

In a Chapter 13 Bankruptcy we prepare a Chapter 13 Plan. In the Chapter 13 plan we propose that after you pay your monthly necessary living expenses and payments on secured debts (i.e. home mortgages, car payments) the amount left over is paid monthly to your unsecured creditors.
A Chapter 13 Bankruptcy takes several years to complete. The fees are around double the fees a Chapter 7.
You might have heard that a Chapter 13 is less damaging to your credit than a Chapter 13. I know of no basis for that belief.
So, a Chapter 13 takes much longer than a Chapter 7 to complete, you have to pay some of your debts, and it’s more expensive…then why would anyone file a Chapter 13 as opposed to a Chapter 7?

Here is the answer:

Some debtors cannot qualify for a Chapter 7 because they make too much money. They flunk the means test. (The means test is a test to see if you make too much money to declare bankruptcy.) Other debtors have property that is nonexempt property which they would lose in a Chapter 7. So, in other words, some people are stuck filing for Chapter 13 because it is impossible or unwise to file for a Chapter 7.
But for some debtors a Chapter 13 can do much more for them than a Chapter 7. What can a Chapter 13 Bankrutpcy do for you that a Chapter 7 can’t? In a Chapter 13 you may be able to Lien Strip.

In a Chapter 13 your attorney prepares a plan to submit to the court. In the plan your debts are divided up into secured and unsecured debts. Generally speaking the plan must provide that you are paying the secured debts in full. But you only have to pay your unsecured debts to the extent that you can afford to pay them.. This is usually far less than 100% of the debt. And you get to pay them over 3 – 5 years Once you complete the plan the unpaid balance of these unsecured debts is discharged.

In a Chapter 13 the plan can provide that a portion of a secured debt be considered unsecured. That unsecured portion can be “stripped off” and paid off, in the plan, like unsecured debt.

This happens when debtors owe more on their property than the property is worth.

Unfortunately, you are allowed to lien strip for all property except your personal residence and your car. You can lien strip for your vacation homes, yachts, airplanes – but not your home. However, you can lien strip a 2nd mortgage on your home if it is wholly unsecured.

As your San Diego Bankruptcy attorney I will help you choose between a Chapter 7 and a Chapter 13 bankruptcy.

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