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Filing for Bankruptcy: Chapter 7 vs. Chapter 13

chapter 7 vs chapter 13 bankruptcy infographicNobody wants to file for bankruptcy, but it's a key safety net for certain situations. If you are buried in debt, being harassed by creditors, and on the verge of losing your home, then filing for bankruptcy can be your way out.

It's an admission that you are not going to be able to handle your debt without some help, and a reset button to help you get your life back in order. One key question is whether you should file Chapter 7 or Chapter 13 bankruptcy. Understanding the differences between the two is vital.

What Both Kinds of Bankruptcy Achieve

Regardless of the kind of bankruptcy you file, there are some benefits that you will get from filing bankruptcy:

  1. Creditors will have to stop hassling you. When you file bankruptcy, something called an automatic stay goes into effect immediately. Your creditors have to stop trying to collect the money from you (with some exceptions, such as support obligations).
  2. Civil lawsuits will immediately stop. If you are facing a civil debt collection action and file for bankruptcy, the automatic stay will prevent a creditor from pursuing the case. Note that filing for bankruptcy does not halt criminal cases or family courts cases such as divorce or child custody.
  3. It can get rid of your credit card debt. The amount depends on the type of bankruptcy you are filing, but even under Chapter 13, you may be able to discharge quite a bit of that debt. This is because credit card debt is considered general unsecured debt, and has the lowest priority in a bankruptcy.
  4. It can get rid of medical debt. Like credit card debt, medical bills are considered general unsecured debt, and are easily wiped (under chapter 7) or maybe dramatically reduced or eliminated (under chapter 13) - this is why medical bankruptcy is a thing.
  5. It stops most wage garnishment. The automatic stay also stops wage garnishment, except for domestic support obligations. One big reason to file bankruptcy is if wage garnishment is leaving you without enough money to live on.
  6. It can discharge personal loans.  which are also considered general unsecured debt.

So, that's both kinds of bankruptcy, now let's go through the differences.

couple looking at laptop

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is also known as "liquidation" bankruptcy; it's for people who are so buried in debt they know that they can demonstrate that no payment plan is going to help. In order to get chapter 7, you have to pass a means test to show that you are literally unable to pay your debts. If not, you are still eligible to file chapter 13.

Chapter 7 bankruptcy has these features:

  1. It's quick. Chapter 7 bankruptcy normally takes about three months to complete, although it can sometimes take longer. Then it is over and done with, and you can start to rebuild your life.
  2. You may have to give up some of your stuff. Your assets are listed and reviewed to determine whether they are protected (exempt) under your state's exemption laws. This might include a home with too much equity. However, creditors can't touch exempt property. This may include your home with equity that is covered by your exemptions, and may include most or all of your personal property, including clothing, household goods and appliances, cars, retirement accounts, and even cash or bank accounts. Each stat has its own exempt property list, so the number of assets that can be protected under chapter 7 will be different depending on where you reside.
  3. Foreclosure is halted only during the short period that the chapter 7 case is open, and a lender may petition the court to continue with it anyway. If you are behind on home mortgage payments, chapter 7 will not fix that and is most likely not the best bankruptcy option for saving your home.
  4. Vehicle repossessions are the same deal. If you are behind on payments and your auto lender is coming after your car, chapter7 will not fix that and is most likely not the best bankruptcy option for keeping your car.
  5. Chapter 7 does not wipe out tax debts owed to the IRS or to states for recent years. You will still have to pay those debts after chapter 7, although you may be able to establish a repayment plan separately with the tax agency.

Chapter 7 does wipe out most of your debt and give you a complete fresh start, but if you are behind on home or car payments, or own assets that are not exempt, it is usually not your best option.

Chapter 13 Bankruptcy

Chapter 13 is also called a reorganization bankruptcy. While a chapter 7 bankruptcy is to get rid of most unsecured debts you know you will never be able to pay, Chapter 13 is often a better option if one of these factors is present: 1) you can't pass the chapter 7 Means Test; 2) you own assets that can't be protected by your exemptions; 3) you are behind on car or house payments, or 4) you owe tax debts or other debts that cannot be wiped out in chapter 7.

Features of Chapter 13 include:

  1. Generally, a three to five-year repayment plan on debts, with first priority given to paying secured debts such as your mortgage or car loan, as well as recent tax debts. Other debts, including older tax debts and other general unsecured debts, maybe paid all, some, or none of the debt owed, depending on your income and your non-exempt assets.
  2. You will not have to surrender any of your stuff.
  3. A foreclosure will be halted, as long as you keep up with your chapter 13 repayment plan.
  4. Repossessions will also be halted, and your car loan can be included in your chapter 13 repayment plan.

If you have high debts and are not sure how to pay them all off, then it may be time to call a bankruptcy lawyer. Contact Shulman Law Offices for a free consultation. We can advise you whether bankruptcy is your best option. We'll also help you decide which kind of bankruptcy to file, or help you determine if there is another way out of your current financial situation.


bankruptcy and coronavirus covid-19

Bankruptcy and Dealing with Debt During & After the COVID-19 Crisis

bankruptcy and coronavirus covid-19

The COVID-19 pandemic is a public health crisis that has impacted the lives of millions of people around the world and in California. To try to control the spread of the virus, many cities and multiple states have issued stay-at-home or shelter-in-place orders and have ordered nonessential businesses to close. While slowing the economy is necessary to prevent further spread of the disease and to flatten the curve so that the health care industry won’t collapse, it has also left millions of people facing job losses and financial devastation. Here are some of the options that are available to people to help them to make it through the COVID-19 crisis and to gain financial footing once the crisis ends.

 

Mortgage and Other Types of Relief

As millions of Americans have lost their jobs, some major banks have announced that they will offer homeowners some mortgage relief. This relief varies and depends on the lender. For each bank or lender, the onus is on the borrower to take the first step to make contact and ask about the available options. Here are some of the programs that are currently being offered (updated as of 3/28/20):

Ally Bank says that it will defer payments for mortgagees for up to 120 days without charging them late fees or finance fees.

Bank of America has also stated that it will offer payment deferrals to mortgagees for mortgages that it holds and will pause evictions and foreclosures.

Chase says that it will offer assistance to people who are struggling with their mortgages but does not state what type of assistance will be provided. It encourages people to call the bank for more information about the relief that might be available to them.

Wells Fargo states that it will offer payment deferrals and fee waivers upon request for mortgages, auto loans, credit cards, small business loans, and others.

Some other banks and lenders are also offering relief to homeowners who have lost their jobs because of the COVID-19 pandemic. You should contact your lender to find out whether any programs might be available to you. Many lenders, including Capital One, Santander, TD Bank, Hyundai, and others, are also offering payment assistance to people who are struggling to keep up with their auto loan and credit card payments. Check with your lender for more information about the options that you might have.

 

Coronavirus Tax Relief

The Department of the Treasury, the Department of Labor, and the Internal Revenue Service have all announced tax relief measures during the COVID-19 pandemic. The tax filing deadline has been changed from April 15 until July 15, regardless of the amounts that people might owe. If you are expecting a refund, however, you should go ahead and file your income tax forms to receive what you are owed.

 

The Franchise Tax Board has announced similar extensions for California tax filers here:  https://www.ftb.ca.gov/about-ftb/newsroom/news-releases/2020-3-state-postpones-tax-deadlines-until-july-15-due-to-the-covid-19-pandemic.html

 

Government Stimulus Checks

Another part of the $2.3 trillion stimulus bill that was passed by Congress and signed into law by the president is $250 billion of direct payments to people. Under this plan, individuals with an Adjusted Gross income (AGI) $75,000 per year or less will receive stimulus checks of $1,200. Married couples who make a combined total of $150,000 or less will receive $2,400.

The payments start to phase out for individuals and couples who make more than those amounts. Individuals with an AGI of at least $99,000 will receive nothing, and married couples with a combined AGI of at least $198,000 will also receive nothing.  In addition to the stimulus checks to individuals or married people, those who have children who are younger than age 17 will also receive checks of $500 per child.

The stimulus checks will be based on the last tax return that you filed. If you did not file in 2018, you should go ahead and file your 2019 return now. Similarly, if you made too much to qualify for the 2018 tax year but made a qualifying amount in 2019, it is also a good idea to go ahead and file your tax return now. People who owe back taxes or are past-due on their student loans will still be eligible for checks.  If you owe back child support, however, your check may be reduced or used to pay towards your arrears.

 

Here is a link to a New York Times article with more information: https://www.nytimes.com/article/coronavirus-stimulus-package-questions-answers.html?referringSource=articleShare

 

Is Bankruptcy an Option?

During this period of economic upheaval, many families will be facing difficult financial decisions that they never thought would face them.  Bankruptcy has long been an option for people who are overwhelmed by unmanageable debt and are unable to make their payments. Bankruptcy is a safety net for people who need it.

There are a couple of different types of bankruptcy that might be available to you:

Chapter 7 – This is a type of bankruptcy through which most types of unsecured debts, such as medical bills, credit card debt, and personal loans, can be wiped out. While some of your assets might become a part of the bankruptcy estate, many people can keep most if not all of what they own through the available exemptions.

Chapter 13 – This type of bankruptcy allows people to enter into a court-supervised repayment plan that lasts from three to five years.  Chapter 13 might be a good option for people who do not qualify for Chapter 7 or who need relief to stop a home foreclosure or a car repossession.  For example, a Chapter 13 bankruptcy plan can allow you more time to catch up on your mortgage payments and save your home.

Another important consideration is that, if you are thinking of borrowing money or taking withdrawals from your retirement savings to pay your debts,  bankruptcy may offer a better option.  If the Covid-19 crisis has left you unable to both pay all your bills and provide for your family’s basic living expenses, bankruptcy might be the right solution for you.

If you are in financial distress, you should consult with an attorney to learn more about your bankruptcy options.  During the shelter-in-place orders currently in effect, Shulman Law Offices in San Jose, California is offering free consultations by phone or Zoom conference to residents of Santa Clara, Santa Cruz, San Benito, and Monterey counties. Click here to contact Ike Shulman for more information.


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What Assets Can I Protect If I File Bankruptcy?

What Assets Can I Protect If I File Bankruptcy?

Hi, this is Ike Shulman of Shulman Law Office. Exemptions help you determine how much of your property you get to keep when you file for bankruptcy. Exemptions play different roles depending on whether you are filing a Chapter 7 or Chapter 13 bankruptcy. Exemptions allow you to keep a certain amount of assets safe in bankruptcy, such as an inexpensive car, professional tools, clothing, and a retirement account.Read more


san jose bankruptcy shulman law

Can Bankruptcy Stop Creditors From Garnishing My Wages, Taking Money From My Bank Account?

Can Bankruptcy Stop Creditors From Garnishing My Wages, Taking Money From My Bank Account?

Hi, this is Ike Shulman of Shulman Law Office. If you fall behind on your debts, your creditors might sue you and try to garnish your wages. This can make it impossible for you to pay other bills, or even pay your rent or mortgage. Should you find yourself in this situation, filing for Chapter 7 or Chapter 13 bankruptcy may be the best option for you.Read more