What's the Difference between Chapter 7 and Chapter 13 Bankruptcy?

Quite simply, a Chapter 13 Bankruptcy is a debt consolidation plan administered by the federal government through the United States Trustee's Office.

Instead of cancelling out your debts, in a Chapter 13 Bankruptcy you may repay your debts, often for pennies on the dollar, pursuant to a Court approved repayment plan.

In many cases, it's safer than private debt consolidation as many debt relief companies charge excessive fees for a similar service, but without any of the guarantees offered by the Bankruptcy Court and little/no results.

Consumers may also strip unsecured junior liens on their homes and repay them at a fraction of the cost in Chapter 13.

What are the Potential Problems?

The problem is that getting a Chapter 13 bankruptcy plan approved can be more complicated than a Chapter 7 cases so they cost more ($2800+).   (See Official BK Court Statement of Rights and Responsibilities re Attorney Fees for Southern District CA).  Moreover, a lot more can happen during the life of your 3-5 year plan, than during a 3 month Chapter 7 bankruptcy.

Many Chapter 13 filers with the best intentions default on their monthly payment obligation to the bankruptcy trustee through no fault of their own.  The court may then dismiss your case and you're right back at square one with your creditors but would potentially receive the money you paid into the court back.

I've heard that as many as 66% of chapter 13 bankruptcies default on the plan, however the ones that make it through to the finish often receive a dollar-for-dollar benefit greater than many Chapter 7 filers.

Why File Under Chapter 13?

There can be a lot of benefits for filing under Chapter 13 of the United States Bankruptcy Code.  The foregoing is not an exhaustive list and is meant to help demonstrate the most common types of Chapter 13 filers - many others exist.  Do not rely on these representations.  Consult with an attorney regarding the specific facts of your case before making a decision.

• Debtors who fail the Chapter 7 means test but still wish to discharge the bulk of their debt pursuant to a repayment plan
• Debtors who could afford their monthly mortgage payments on their 1st and 2nd home mortgages if: (1) their second mortgage lien were stripped and remaining debt reduced to pennies on the dollar, and (2) the property value has sunk so low that the second mortgage loan is entirely unsecured.  In which case, you may be able to file a motion to strip the lien and repay your 2nd mortgage pursuant to the terms of the Chapter 13 plan
• Debtors who feel an ethical/moral obligation to repay some of their debts rather than discharge them under Chapter 7 Bankruptcy and not pay anything on them
• Less harm to your credit score than a chapter 7 bankruptcy

Conclusion

If you are considering Chapter 13 then we strongly recommend that you contact an attorney right away.  We offer low cost chapter 13 payment plan calculations and means testing given the facts of your case.  (619) 794 0460