The decision whether to file for Chapter 7 or Chapter 13 bankruptcy can be difficult. Bankruptcy attorney Benjamin J. Ginter runs the Law Offices of Benjamin J. Ginter in Cranford, New Jersey. Here, he talks about which chapter you need to file to wipe out your debts and make a new start in your life.
Chapter 7 Bankruptcy
A Chapter 7 bankruptcy begins with the filing of a bankruptcy petition. The petition will contain a list of your assets, debts, income and expenses. A bankruptcy trustee is then designated to the case, who is usually an attorney or an accountant appointed by the Bankruptcy Court.
The trustee will oversee your matter. He or she is looking for assets that can be sold with the proceeds going to pay back your creditors. Under the Bankruptcy Law, certain property is exempt, which means the trustee cannot take it from you. Often when you file for Chapter 7 bankruptcy, you are able to keep your certain property because of the exemptions.
Chapter 13 Bankruptcy
When you file for Chapter 13, you are, in effect, proposing a payment plan. You will make monthly payments to the bankruptcy trustee over a certain period of time, usually 2 to 5 years. This type of bankruptcy is known as a reorganization bankruptcy, and it is suitable for those who have non-exempt property they want to keep.
The reason some people may choose to file a Chapter 13 instead of a Chapter 7 is that they have a home with equity that exceeds the exemption amount. If they file for a Chapter 7 under that circumstance, they would lose their home. Therefore, they file for a Chapter 13 so that they can keep their home. You may also have to file for Chapter 13 if your income exceeds the allowable amount and/or you are behind in paying your secured debt (such as a mortgage). Chapter 13 is much more complicated, which is why you need an experienced attorney guiding you each step of the way.
The Difference Between Two Chapters
In short, Chapter 13 is basically a repayment plan, while Chapter 7 is known as straight bankruptcy. It is up to you and your bankruptcy attorney to decide which chapter is more appropriate to your specific needs. Be aware that filing for the wrong chapter, however, can make you lose your house.
If you filed for Chapter 7 in the past eight years, you cannot file again, so you have to file for Chapter 13. In that case, if you have a lot of equity in your home and it is not exempt, you would propose plans to the trustee saying that you would like to keep your home. In return for keeping your home, you would make payments every month.
Federal and State Exemptions
You may choose to use either the federal or state exemptions when you file for bankruptcy. For example, in New Jersey, a single person who files for bankruptcy could be exempted from up to $20,000 of equity in his home if he has it, plus miscellaneous costs including broker’s fees. Often that number could swell up to $30,000.
However, if you have property that clearly exceeds the exemption value � let’s say you have $80,000 of equity in your home and are unable to exempt that � you could consider filing for Chapter 13. That’s because if you file for Chapter 7, the trustee could theoretically sell off your house and use that money to pay off your creditors.