Chapter 7 bankruptcy is basically liquidation – all of the debtor’s assets (besides those which are exempt) are sold to pay off his or her debts. If there is any additional unsecured debt after the assets have been sold, it is discharged (the legal duty to pay it disappears). Some debts can never be discharged however, such as student loans and child support. Any secured debt (mortgages, car loans, any other debt with collateral attached) will be discharged by transferring the remaining security to the creditor(s).
Chapter 13 bankruptcy is a structured repayment plan, and involves a debtor paying off as much of his or her debt as possible over a 3-5 year period. It is usually used by people who have a steady income. Chapter 13 usually allows creditors to get more money back than they would under Chapter 7 liquidation.
Filing for Chapter 13 requires a number of different things, although filing for Chapter 7 bankruptcy first fulfills the credit counseling requirement as well. The borrower should have his or her tax filings from the last four years, at the very least.
Chapter 13, unlike Chapter 7, requires that debtors have no more than $1,149,525 in secured debt, or debts for specific property. Debtors also make not have more than $383,175 in unsecured debt, or general debt not tied to specific assets. These numbers are adjusted for inflation every few years; the next adjustment to Chapter 13 income requirements will be in April 2016.
Similar to Chapter 7, courts have the right to dismiss a petition for Chapter 13 bankruptcy if the petition was made in bad faith. If the borrower wants to switch to Chapter 13 to hide assets, the petition will be denied.
Note that there is no fee for switching from Chapter 7 to Chapter 13 bankruptcy.
There are some reasons why a person may want to switch from Chapter 7 to Chapter 13. Consider:
A court may also order a debtor to switch from Chapter 7 to Chapter 13 bankruptcy if it is determined he or she has enough income to repay his creditors.
A debtor can switch once without court approval. However, after that, he or she will need approval of the bankruptcy court in which they filed to switch again. Courts will rarely let a person switch back and forth repeatedly, so it is not a decision to be made lightly.
Filing for bankruptcy is a difficult and emotional decision filled with complicated issues. Converting from one type of bankruptcy into another can be confusing, especially if the paperwork looks the same. A bankruptcy attorney is familiar with the new laws can help you through this difficult time, explaining your options and determining which is best for you.
Last Modified: 12-20-2013 01:43 PM PSTLaw Library Disclaimer
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