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What’s the difference between chapter 7 and chapter 13 bankruptcy?

The vast majority of bankruptcies are filed under either chapter 7 or chapter 13. If you file bankruptcy, you will need to determine which is the better choice for you.

Chapter 7: Liquidation

If you file chapter 7, all of your non-exempt assets will be sold, and the funds from these sales will be distributed to your creditors. Your remaining debt from these creditors is then discharged, giving you a fresh start. You may protect some or all of your assets from liquidation with your exemptions. In North Carolina, you may exempt:

• Up to $35,000 for equity in a house
• Up to $3,500 for equity for one car
• Up to $5,000 for household items plus $1,000 for each additional member of your family.
• Up to $2,000 for your “tools of trade”
• If you did not use your house exemption, then up to $5,000 that can be applied to anything.

Some people who file are able to exempt all of their property, which means they will not pay anything other than the filing fee.
Pros of filing Chapter 7

• Possible to exempt all assets in some cases
• Majority of cases can achieve discharge within 3-4 months of filing.
• Attorney fees are typically lower than in Chapter 13 cases

Cons of filing Chapter 7

• For clients with more assets, may need to liquidate some assets
• Will not help if behind on secured debts
• Attorney fees must be paid up front.

Chapter 13: Reorganization

If you file chapter 13, instead of your non-exempt assets being sold, you will pay a monthly amount that will be distributed to your creditors. After 3-5 years of monthly payments, your remaining debt is discharged. If you are behind on payments for a secured debt such as a mortgage or a car loan, then you may “catch up” on payments through the chapter 13 plan. In addition to these monthly payments, you will also have to continue making your normal mortgage and car payments.

Pros of filing Chapter 13:
• Don’t have to liquidate any of your assets
• Can help if you are behind on secured debts
• Most attorney fees are paid through the plan

Cons of filing chapter 13:
• Have to make monthly payments for 3-5 years
• No discharge until all payments are made
• Often more costly than a chapter 7 bankruptcy.

If you are considering filing for bankruptcy, contact the Law Office of Klaus R Johnson for a free consult to help you decide whether to file chapter 7 or chapter 13.

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