If you’re overwhelmed by debt and looking for a way out, bankruptcy may be a viable path toward financial relief. But not all bankruptcy options work the same way or are right for every person. The two most common types for individuals are Chapter 7 and Chapter 13, and understanding how they differ is crucial if you’re thinking about filing in California.
Chapter 7 Bankruptcy: Liquidation and a Fresh Start
Chapter 7 bankruptcy is designed to help individuals eliminate most unsecured debts, such as credit cards, medical bills, and personal loans. It’s often referred to as a liquidation bankruptcy because it may involve selling some of your non-exempt assets to repay creditors.
To file Chapter 7, you must pass the means test. This compares your income to the median income for a household of your size in California. If your income is below the state median, you can typically qualify. If it’s above, you may still qualify after deducting certain allowable expenses.
How the process works:
- Filing the Petition: You’ll start by filing a petition with the bankruptcy court, which includes detailed information about your income, assets, debts, and recent financial transactions.
- Automatic Stay: Once filed, an automatic stay goes into effect. This stops most creditors from pursuing collections, lawsuits, garnishments, or foreclosures during the case.
- Trustee Review: A court-appointed trustee reviews your paperwork and may sell certain non-exempt assets to pay creditors. However, California allows for generous exemptions, and many people keep most or all of their property.
- Meeting of Creditors (341 Meeting): You’ll attend a brief hearing where the trustee and creditors (if they show up) can ask questions.
- Debt Discharge: If everything is in order, the court typically discharges qualifying debts within three to five months.
Chapter 7 can be the right move but it’s important to understand what it doesn’t do. It doesn’t eliminate secured debts like mortgages or car loans unless you’re willing to surrender the property. It also doesn’t erase student loans, recent taxes, or child support.
Chapter 7 is a faster route to relief but may not be the best choice if you have significant non-exempt assets or are behind on secured debt and want to keep your property.
Chapter 13 Bankruptcy: Reorganization and Repayment
Chapter 13 bankruptcy offers a different route. Instead of eliminating debt right away, you commit to a repayment plan, usually over three to five years. This type of bankruptcy is often best for people who have regular income but have fallen behind on their home payments, owe significant tax debt or have assets that cannot be protected in chapter 7. Sometimes you make too much to file Chapter 7 and must file Chapter 13
You must have steady income and your total debt must be within limits set by federal law. These limits adjust periodically. Chapter 13 works well for those who don’t qualify for Chapter 7 or want to protect certain assets.
How the process works:
- Filing the Petition and Repayment Plan: Along with your bankruptcy petition, you submit a proposed repayment plan outlining how you’ll repay debts over the plan period.
- Automatic Stay: Like Chapter 7, an automatic stay kicks in to stop collection efforts.
- Court Review and Confirmation: The court and the trustee review your plan, and creditors can object. Once the plan is confirmed, you begin making payments, usually to the trustee, who then pays your creditors.
- Meeting of Creditors: Similar to Chapter 7, you’ll attend a hearing for creditors to ask questions.
- Making Payments: You’ll continue payments as required by your confirmed plan. This typically includes mortgage arrears, car payments, and a portion of unsecured debts.
- Debt Discharge: After completing your plan, any remaining eligible unsecured debt is discharged.
Chapter 13 allows you to:
- Catch up on mortgage or car payments and keep the property
- Protect non-exempt assets from liquidation
- Potentially reduce or eliminate second mortgages or unsecured liens
It’s a longer process than Chapter 7 but offers more flexibility and protection if you’re behind on secured debt or own valuable assets you want to keep.
Key Differences Between Chapter 7 and Chapter 13
Choosing between Chapter 7 and Chapter 13 bankruptcy comes down to your financial situation, goals, and what you’re trying to protect. One of the most significant differences lies in the timeline. Chapter 7 is typically resolved within three to six months, offering a faster route to debt discharge. In contrast, one of the cons of Chapter 13 bankruptcy is that it spans three to five years, during which you’ll follow a court-approved repayment plan. That extended timeline can be a dealbreaker for some but a lifesaver for others trying to catch up on secured debt like a mortgage or car loan.
Another key distinction is how each chapter treats your assets. Chapter 7 is a liquidation process, meaning the court-appointed trustee can sell any non-exempt property to repay creditors. However, California offers generous exemptions, and many filers don’t lose anything.
Chapter 13 doesn’t involve liquidation; instead, you keep your property and repay a portion of your debts based on your income and what you can afford. This makes Chapter 13 a better fit for individuals who own valuable assets or have equity they want to preserve.
Both types of bankruptcy will impact your credit. A Chapter 7 filing remains on your credit report for 10 years, while Chapter 13 stays for seven. Still, many people begin rebuilding their credit soon after the case ends.
Ultimately, if you’re looking for a clean slate and have few assets, Chapter 7 may be the best fit. But if you need time to catch up on missed payments, want to keep your property, or don’t qualify for Chapter 7, then Chapter 13 could provide a more sustainable long-term solution.
If You’re Ready for a Financial Reset, We’re Ready to Help
Deciding between Chapter 7 and Chapter 13 is a big decision with long-term consequences. At Janus Law, we guide California residents through every step of the bankruptcy process. Whether you need a fresh start or a structured repayment plan, we’ll help you choose the right option based on your financial goals and personal circumstances.
Contact Janus Law right now to schedule a consultation and find out which bankruptcy path is right for you.
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