Chapter 7 & Chapter 13 Differences

Chapter 7 bankruptcy is sometimes referred to as the “liquidation bankruptcy” which sounds pretty scary.  In reality, it is the quickest and easiest form of bankruptcy.  In most cases, the process is completed in about 100 days. 

Though Chapter 7 offers a quick result it still requires detailed analyses.  The person (or married couple) that files is known as the “petitioner” and the petitioner has many rules to follow and requirements to fulfill.  Two main areas of interest: the full and complete disclosure of all ASSETS and all INCOME. 

Since Chapter 7 is a “liquidation” your attorney needs to know about everything you own, control, and possess and the value of everything you own, control, and possess.  Most people want to know what assets they will lose when they file the Chapter 7.  Any non-exempt asset (an asset not protected under state statute) may be at risk. 

Ideally, all of the assets fit into an exemption category.  If not, the Chapter 7 Trustee will claim any asset not protected.  The Chapter 7 Trustee may take the asset, sell it and use the proceeds to distribute funds to the creditors who file claims in the case.  Alternatively, and sometimes preferably, the Trustee will allow the Debtor to keep an asset as long as he or she pays the non-exempt portion back to the Trustee. 

Please re-read the previous paragraph!  It is extremely important to disclose to your attorney all of your property and its fair market value.  An experienced attorney will be able to provide you feedback about your property and whether it will be 100% protected through a Chapter 7 bankruptcy case. 

Second, the Debtor’s income must be within the required threshold to qualify for the household size.  On May 1, 2020, the median income for Nebraska households will be updated to the following:

1 person household: $49,680
2 person household: $69,294
3 person household: $78,674
4 person household: $95,445

If your household income is more than this set median income, you may not qualify for the Chapter 7. 

If you either (1) have non-exempt assets or (2) earn over the median income you may proceed with the Chapter 13.

In a Chapter 13, the Debtor may retain possession of all of his or her assets since the Chapter 13 will propose to repay any non-exempt portion through the Chapter 13 plan.  The Chapter 13 plan is similar to a debt consolidation program.  All of the debt is consolidated into the plan and the Debtor agrees to pay back a portion.  The amount the Debtor must pay back is based on again: (1) the non-exempt assets, (2) secured and/or priority claim, and (3) the Debtor’s disposable monthly income. 

Unlike a debt consolidation company, the Chapter 13 offers a guaranteed result – at the end of the plan you do not owe anything (except if a mortgage is involved or the case involved non-dischargeable debt like student loans).   It is also important to note that the Chapter 13 plan payment is based on what you can afford to pay and not what the creditors will agree to settle on.  

Chapter 7
Pro- Quick turnaround- out of bankruptcy after 90 days
         No repayment plan
         Start rebuilding credit sooner
Con- May remain on your credit for up to 10 years
         Non-exempt property may be taken
         You may not qualify if you have disposable income

Chapter 13
Pro- You will not lose a non-exempt asset
        You may save a home from foreclosure in the Chapter 13
Con- You are in bankruptcy for 3-5 years
         You will have a repayment plan involving monthly payments

This office can help determine which type of case is in your best interest.