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The Difference Between Chapter 7 and Chapter 13 Bankruptcy
Bankruptcy laws in the United States protect people nearing the end of their financial rope, keeping them from complete ruin. Financial crisis can strike anyone, and from seemingly out of nowhere. People living within their means can be burdened by unforeseen medical bills, or a sick family member, or sudden layoff or death in the family. Employment can be even more precarious following the COVID-19 pandemic, as the economy scrambles to find the new normal. When the burdens become too onerous to bear, bankruptcy attorneys can use state and federal laws to help protect debtors and help them find a path back to financial solvency.
The bankruptcy specialists at Allen Stewart P.C. will use their years of experience to determine the best solution for your specific financial situation. They will work with you, examine your records and specific circumstances and tailor a plan just for you that will help you get back on your financial feet. The first step to take is yours, by reaching out to Allen Stewart P.C. today and getting the ball rolling. Your financial problems can only multiply the longer you wait before seeking help, so the sooner you start the bankruptcy process, the better your chances of getting a positive outcome.
Individuals seeking bankruptcy protection generally have two options under U.S. bankruptcy laws: Chapter 7 or Chapter 13 bankruptcy. The primary difference between the two bankruptcy types is how they handle outstanding debts; Chapter 7 eliminates most unsecured debts allowing a debtor to start over fresh, while Chapter 13 “bundles” those debts into a single repayment the debtor must still pay over time. Chapter 13 bankruptcy clients have enough income to pay their debts, but just need more time than their creditors want to give them. Chapter 7 clients can’t pay their debts and need a lifeboat to get their heads back above water.
Debtors seeking Chapter 7 bankruptcy protection must go through the “means test” before they can file. The means test determines if an individual or married couple qualifies for Chapter 7 bankruptcy relief, or if they must seek alternative solutions. Many factors come into play when deciding who qualifies for Chapter 7 protection including personal health issues, types of debts, business debts and more.
The means test in Texas compares the debtor’s household income to the state’s median income. Average household income is determined by averaging monthly income over the last six calendar months, and then multiplying that figure by 12.
For example, if a single applicant with no children makes less than $47,238 per year, they immediately pass the means test. A two-member household must make less than $63,148, a three-member household must make less than $69,294, and a four-member household must make less than $78,572. If the debtor exceeds the median income, they must continue the test and confront the “presumption of abuse.”
The Means Test is one of several provisions enacted when Congress passed the Bankruptcy Abuse Presention and Consumer Protection Act of 2005. The provisions aimed to discourage Americans from filing bankruptcy if they could still repay their debts. When a bankruptcy applicant makes more than the state median income for their household size, they must cite specific reasons why they can’t pay their debts to overcome the “presumption of abuse.” Reasons considered acceptable under the Act include serious medical conditions, recent job or income loss, active military duty and other specific circumstances.
Those seeking bankruptcy protection must calculate their current monthly expenses versus monthly income, including business and rental income, investment interest and dividends, pensions, retirement plans, unemployment income and money paid by others toward the client’s household expenses. Household expenses include food, housing, utilities and any payments a client is legally obligated to make such as back taxes.
Potential bankruptcy clients with too much income to qualify for Chapter 7 bankruptcy can possibly file for Chapter 13 bankruptcy. Chapter 13 is a longer process than the more common Chapter 7 option, reserved for those with the income to still pay off their debts, though over a longer timespan than their debtors initially wanted.
Chapter 13 doesn’t dismiss debts as much as it bundles those debts into a single payment, which is made to the court-appointed bankruptcy trustee. The trustee then distributes those funds to the creditors per the agreement made in bankruptcy court. Home mortgages aren’t included in the bundle payment, so debtors must keep making those payments if they want to keep their home.
An individual Chapter 13 client must have no more than $394,725 in unsecured debt, including credit cards bills or personal loans. They also can have no more than $1,184,200 in secured debts, including car loans and home mortgages. Filing for Chapter 13 bankruptcy puts a stop to foreclosure proceedings in progress, giving clients time to make those mortgage payments and stay in their home.
Whether the client undergoes Chapter 7 or Chapter 13 bankruptcy, the process begins in the same way: by reaching out to a bankruptcy attorney. The client discusses their financial circumstances and determine what bankruptcy, if any, will help them best. The client then works with the attorney to determine what assets they can keep, and then takes a mandatory credit counseling course online. Chapter 7 bankruptcy clients must complete a second course in “financial management” six months after filing, while Chapter 13 clients must complete the same course in three to five years as they approach the end of their payments.
Within 45 days of the bankruptcy attorney filing a client’s paperwork with the court, the client must attend a 341 Meeting of Creditors. This meeting involves the client, their attorney, their creditors (if any choose to attend, often none do) and an agent of the court. The client and their attorney explain the circumstances surrounding the bankruptcy, answer questions from the court representative, and present all required documents.
Creditors with an interest in the bankruptcy have 60 days from the original 341 meeting date to object to any discharge, based on the circumstances surrounding a particular debt. Creditors can also claim the debtor did not act in good faith and is therefore not entitled to bankruptcy relief. If no objections are filed, however, the case continues. Chapter 7 bankruptcy clients receive an order of discharge from the court as long as they finished their second financial management court. Chapter 13 clients don’t receive their order of discharge until they complete their payment plan within three to five years.
Bankruptcy is more common than many realize. One in five Americans will file for bankruptcy at least once in their lifetimes. As the future in America becomes more fraught with each passing day, Americans need to know their options when they need help. By retaining bankruptcy counsel with Allen Stewart P.C., we will stop creditor harassment and give you the time and tools needed to get your life back on track. The first step starts with a free call to our bankruptcy experts who will work with you to develop the plan best suited for your specific needs.
The longer you wait, the more difficult the recovery process will be. Contact the office of Allen Stewart P.C. today and get your financial life back on track. Your future is at stake.