Personal Bankruptcy: The Ins and Outs of Chapter 7 and Chapter 13

Chapter 7 Bankruptcy 

Chapter 7 is designed for individuals with limited income who cannot afford to repay their debts. In a Chapter 7 case, certain non-exempt assets can be sold to pay creditors, and most unsecured debts are then discharged, offering individuals a fresh financial start. Passing the means test is essential to ensure you qualify.

Chapter 13 Bankruptcy 

Also known as “reorganization bankruptcy,” Chapter 13 allows people to propose a three-to-five-year repayment plan to catch up on missed payments while retaining their assets. This approach is especially helpful if you have a regular income and want to protect significant property such as a home or vehicle. In Chapter 13, you pay back creditors following an approved plan, and at the end of the plan, many remaining unsecured debts can be discharged.

• Previous Bankruptcies: You should wait at least eight years after a previous Chapter 7 discharge to file a new Chapter 7 case.

Chapter 13 Eligibility:

• Regular Income: You need a reliable source of income to support a court-approved repayment plan lasting three to five years.
• Debt Limits: As of 2023, your unsecured debts should be below certain limits (e.g., $465,275), and secured debts under specific thresholds (e.g., $1,395,875), though these figures may change.
• Tax Filings: According to the IRS, you should be current on filing tax returns for the four years preceding your bankruptcy filing.

The Means Test: This test is central to determining Chapter 7 eligibility and can also influence how your Chapter 13 plan is structured. It involves a review of your six-month average monthly income compared to the state median. If your income exceeds that median, we calculate your disposable income after allowable expenses to gauge whether you still qualify for Chapter 7 or if a Chapter 13 repayment plan is more suitable.

The Bankruptcy Process: A Step-By-Step Guide

While Chapter 7 and Chapter 13 share some procedural steps, there are significant differences.

1. Credit Counseling

Before filing for bankruptcy—Chapter 7 or Chapter 13—you’re required to complete a credit counseling course through an approved agency. We can help you find a reputable provider and review potential alternatives to bankruptcy. The US Courts website has more information about this. 

2. Means Test (Chapter 7) or Repayment Plan (Chapter 13)

In a Chapter 7 case, we guide you through the means test to confirm your eligibility. For Chapter 13, we work closely with you to develop a proposed repayment plan that fits your budget while fulfilling creditor obligations.

3. Preparing and Filing the Petition

Both chapters require substantial income, assets, debts, and financial affairs documentation. Our attorneys ensure your petition is thorough, accurate, and filed correctly with the appropriate New Jersey bankruptcy court.

4. The Automatic Stay

Upon filing, an automatic stay immediately halts most collection actions, lawsuits, wage garnishments, and aggressive creditor contacts, giving you relief while the case proceeds.

5. Meeting of Creditors (341 Meeting)

About one month after filing, you need to attend a 341 Meeting of Creditors. A trustee and potentially some creditors may ask questions about your finances. We can thoroughly prepare you for this meeting to protect your interests.

6. Financial Management Course

Both Chapter 7 and Chapter 13 require you to complete a financial management course before receiving a discharge. 

7. Chapter-Specific Processes

Chapter 7: After the 341 meeting, the trustee may determine whether you have any non-exempt assets that can be sold to pay creditors.

Chapter 13: You’re required to attend a confirmation hearing where the court approves (or modifies) your repayment plan. You then begin making payments to a trustee. Any remaining qualifying debts are discharged upon successful plan completion (three to five years).

• Automatic Stay Protection: Filing initiates an automatic stay that stops creditor harassment, wage garnishments, and most collection efforts.
• Exempt Property Retention: Many filers keep most or all of their property through exemptions, often including a primary residence, certain personal items, and retirement accounts (up to specific limits).

Disadvantages

• Potential Asset Liquidation: Non-exempt property can be sold to repay creditors. Although exemptions protect many assets, some may be at risk.
• Credit Report Impact: Chapter 7 remains on your credit report for up to 10 years.
• Not All Debts Dischargeable: Student loans, recent taxes, child support, and alimony generally survive Chapter 7. For more insights on which debts can be discharged under Chapter 7, visit our website. 
• Co-Signer Exposure: If a friend or family member co-signed a loan, they remain liable for the debt if you receive a discharge

Pros and Cons of Chapter 13 Bankruptcy

Chapter 13 allows you to keep your property and repay obligations under a court-approved plan. Below are some other key points to consider:

Pros

• Asset Retention: You typically get to keep your home, car, and other vital assets, as long as you continue making required payments.
• Foreclosure Prevention: Chapter 13 can help you stop home foreclosure and catch up on missed mortgage payments over time, as long as you continue making required payments.
• Debt Consolidation: You make a single monthly payment to a trustee, simplifying your financial obligations.
• Shorter Credit Reporting: The bankruptcy notation remains on your credit report for seven years instead of 10 for Chapter 7.

Cons

• Longer Commitment: Repayment plans last three to five years, demanding strict budgeting and adherence to the plan.
• Disposable Income Allocation: You’re required to allocate much of your disposable income toward creditors, limiting your financial flexibility during repayment.
• Credit Score Impact: Like Chapter 7, Chapter 13 also impacts your credit score, although you may rebuild it gradually.
• Possible Dismissal: If you fail to follow the repayment plan, your Chapter 13 case could be dismissed, leaving you unprotected from creditors.

For a more comprehensive view of Chapter 13, visit our website.

Moving Forward with Legal Support

Understanding the distinctions between Chapter 7 and Chapter 13 is essential to making informed decisions about your financial future. Chapter 7 may offer a fresh start in a shorter timeframe but can put certain assets at risk. Chapter 13, by contrast, can help you safeguard your home and assets while catching up on payments, though it requires a longer commitment.

If you’re considering bankruptcy or need guidance on related legal issues, at the Law Offices of Wenarsky and Goldstein, LLC, we’re here to help you move forward with clarity and purpose. Our attorneys are ready to take the time needed to learn about your unique financial concerns, explain your options in understandable terms, and support you every step of the way.

When you choose the Law Offices of Wenarsky and Goldstein, LLC, you’re partnering with a firm that genuinely cares about helping you. If you’re ready to address your financial worries and explore whether Chapter 7 or Chapter 13 bankruptcy is the right solution, we encourage you to contact us and set up a consultation.

Let us guide you toward stability and peace of mind. We look forward to helping you navigate your bankruptcy journey and take the first step toward a brighter financial future.