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Chapter 7 or Chapter 13: Which is best for me?

If you are a California resident considering bankruptcy as a last resort for debt relief, you probably wonder whether Chapter 7 or Chapter 13 is best in your particular situation. FindLaw explains that while approximately 71 percent of bankruptcies are Chapter 7, this is mostly because they are easier and take less time.

Both bankruptcy types have their advantages and disadvantages. Deciding which is best for you depends on how you wish to handle your debt.

Chapter 7

To qualify for Chapter 7, your annual income cannot exceed the current maximum of $47,798.00 if you are a one-person household. If you are a four-member household, it cannot exceed $75,111.00.

Once you qualify, one of the best benefits of Chapter 7 is the many exemptions that apply to your assets, including the following:

  • Homestead - $75,000 if single; $150,000 for families
  • Personal property - food, clothing, furnishings, appliances, pets, etc.
  • Vehicles - up to $1,900
  • Jewelry and heirlooms - $5,000
  • IRAs and Keoughs
  • 75 percent of your wages, plus $5,000 worth of your tools, uniforms, etc.

Another major advantage is that your creditors must immediately stop harassing you for debt collection once you file. In addition, Chapter 7 discharges all your consumer and credit card debt. The major Chapter 7 disadvantage is that while it can forestall the foreclosure of your home, it seldom can stop it.

Chapter 13

Unlike Chapter 7, which is a discharge proceeding, Chapter 13 is a reorganization proceeding. Here you devise a plan, with the help of your bankruptcy trustee, to pay your creditors over a fairly long period of time, usually between three and five years. If you are “upside down” in your home and car, where their respective values are less than their respective remaining loan amounts, you can propose paying the lesser amounts interest free, thereby reducing your overall debt more or less immediately.

Once the bankruptcy judge approves your plan, you proceed to make payments in accordance with it. Your creditors cannot harass you and your mortgage lender cannot foreclose on your home. Nor can your auto lender repossess your vehicle(s). Given that you have a longer period of time in which to pay your debts, you may well get caught up with everything and lose nothing. Best of all, any unsecured debts remaining at the end of your bankruptcy period will be discharged.

The major Chapter 13 disadvantage, if you want to view it as such, is that your consumer and credit card debts are not discharged as they are in a Chapter 7. You must continue to pay them down according to your Chapter 13 payment plan.

This is general information only and not intended to provide legal advice.

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