A Chapter 13 bankruptcy involves a reorganization of your existing debt and a Chapter 7 bankruptcy is a liquidation of assets. In order to be eligible for a Chapter 7 filing, you must be below the median income level for your family size or pass the “Means Test” in another way. The Means Test involves taking your last six months’ worth of household income, getting a monthly average, and then multiplying it by 12. If the result is above the median income after that calculation, the next step in the Means Test is to take the number back down to the monthly average, and then deduct out all the allowable expenses under the Bankruptcy Code.
Once you deducted out all those expenses, a bankruptcy attorney will look to see if you have any disposable income at the end of the month. If you do not have disposable income, then you would still qualify for Chapter 7 bankruptcy. If it is a positive number and it allows you to pay at least 10% of your unsecured debt over 60 months, then you are not eligible to be a Chapter 7 debtor – you would have to file for Chapter 13.
From the time of filing your case to the ultimate discharge, a Chapter 7 bankruptcy is typically less than four months, while a Chapter 13 bankruptcy plan lasts three to five years where you are making payments on your debt repayment plan.
What is the Role of a Trustee in Both Chapters?
The differences between Chapter 7 and Chapter 13 bankruptcy extend to the role of the trustee. In a Chapter 7 liquidation, there will be a trustee whose role is to look at your assets and see if there are any non-exempt equity in those assets. If there is, then the trustee can liquidate those assets and use those funds to pay your creditors.
A person in Chapter 13 bankruptcy is called a debtor in possession, which means you retain possession of all your assets. The trustee in a Chapter 13 does not have the ability to force a sale of anything. In exchange for not losing any of your property, your goal is to file a plan of reorganization to pay back some of your debt over a period of time.
If you are eligible for a Chapter 7 bankruptcy, then we would look at your assets to make sure we can exempt everything and that you are not in danger of losing any of it.
The Goal of Chapter 7 Versus Chapter 13 Bankruptcy
The goal of bankruptcy, in general, is to promote more people paying back some of their debt. Since changes to the bankruptcy laws in 2005, the bankruptcy law sought to push more people into a Chapter 13 bankruptcy than have them file a Chapter 7 bankruptcy where you wipe everything out and move on. Chapter 13 is for people who have regular, reliable income and can afford to pay back some of the debt they owe.
We know it can be difficult to determine your best path when you are struggling with debt. The experienced team at Gillman, Bruton & Capone can explain your options in further detail and work with you on the best bankruptcy plan for your unique situation. Call us for a free case review.