Which Chapter Bankruptcy Should I File?

Are you considering filing for bankruptcy but wondering which chapter is right for you? If you are struggling to make payments on your debt, bankruptcy may be able to help you get a fresh start. Chapter 7 Bankruptcy and Chapter 13 Bankruptcy are the two basic types of bankruptcy for an individual; however, there is no clear answer about which chapter is best in every situation. Instead, Chapter 7 may be better for some individuals and Chapter 13 for others. Which is best often depends on factors such as:

  • What type of debt you have;
  • How much income you have;
  • Whether you own a house, car, or other large assets; and
  • Whether you own a business.

Chapter 7 Bankruptcy

Most individuals who file for bankruptcy file for Chapter 7, also called a liquidation bankruptcy. In Chapter 7 Bankruptcy, an individual sells or liquidates all of their non-exempt assets, the proceeds of which go to pay off their creditors. Compared to Chapter 13 Bankruptcy, Chapter 7 Bankruptcy is relatively fast, lasting only about four to six months in most instances.

Because Chapter 7 Bankruptcy allows a debtor to quickly free themselves from much of their unsecured debt, it can be a useful tool for persons who have a lot of debt and few assets. However, for debtors with substantial income or assets, Chapter 7 Bankruptcy may not be the best choice because it requires liquidation of all non-exempt assets.

In determining whether Chapter 7 Bankruptcy is a good option for you, it is important to think about how California’s system of property exemptions matches the assets that you have and may want to keep. Generally, California’s system of property exemptions presents two options:

  1. The first option, called “system 1,” is preferable for debtors who own their own homes because it has a substantial homestead exemption. For single filers, this means that $75,000 of the value of their home is exempt from bankruptcy. However, this number is increased for families, disabled persons, or persons who are older than 65.
  2. The second option, called “system 2,” is generally better for debtors who do not own their homes. System 2 has a substantial wildcard exemption which can be used to cover other valuable assets such as a car, boat, or any other property that the person filing for Chapter 7 has.

Chapter 13 Bankruptcy

Unlike Chapter 7, Chapter 13 Bankruptcy does not focus on liquidating the debtor’s assets. Rather, the focus in Chapter 13 is on how much disposable income the debtor has. In Chapter 13 Bankruptcy, the debtor presents a payment plan to the bankruptcy court. The payment plan represents the debtor’s best effort at paying back their nonpriority unsecured creditors over either three or five years. If the payment plan is confirmed and the debtor successfully completes it, much of their debt can be forgiven. However, the creditors must receive at least as much from the debtor in Chapter 13 as they would if the debtor had declared Chapter 7 Bankruptcy.

Chapter 13 Bankruptcy can be a good choice for a debtor who:

  1. Has a sufficient amount of disposable income;
  2. Does not want to sell or liquidate their assets;
  3. Does not qualify for Chapter 7 bankruptcy (for example, if their income is higher than the state’s median);
  4. Is behind on a mortgage payment or car payment and simply needs time to catch up; or
  5. Has a co-debtor on debt.

Contact an Oakland Bankruptcy Lawyer Today

Are you thinking about filing for bankruptcy but unsure about whether bankruptcy is a good decision or which type of bankruptcy, Chapter 7 or Chapter 13, would be best? Contact an experienced Oakland bankruptcy attorney by calling us at 510-255-4646 or contacting us online. We can help advise you about how bankruptcy can help you get a fresh start.

The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.