Filing for bankruptcy can be difficult, and making an informed decision about how to file can be a bit tricky as well. Bankruptcy attorney Benjamin J. Ginter runs the Law Offices of Benjamin J. Ginter in Cranford, New Jersey. Here, he explains which chapter you need to file in order to wipe out your debts and start fresh.
If you are struggling financially, our law offices can help. The decision whether to file for Chapter 7 or Chapter 13 is a difficult one and requires an experienced bankruptcy attorney who understands all the legal ramifications and can help you make the right choice.
Chapter 13 vs. Chapter 7
The difference between the two chapters of bankruptcy concentrates on the fact that when you file for Chapter 13 you are, in effect, proposing a payment plan. The debtor will make payments to the bankruptcy trustee over a fixed period, usually two to five years. This type of bankruptcy is known as a reorganization bankruptcy, and is appealing to those who have non-exempt property they want to keep.
Chapter 7 is known as straight bankruptcy, when all non-exempt property it turned over to the bankruptcy trustee to convert it into cash and pay off the creditors. In most cases, the debtor has no real assets to lose, which means he has a quick start in a relatively short period of time.
Reasons Vary
The reasons for filing Chapter 13 over Chapter 7 vary. If you filed Chapter 7 in the past eight years, you cannot file again, so you have to file Chapter 13. In that case, if you have a lot of equity in your home and you cannot exempt it, then you would propose plans to the trustee saying that you would like to keep your home. In return for letting you keep your home, you would make payments each month. The payments go back to how much equity you could have raised had you filed Chapter 7.
With Chapter 7, the process works a bit differently. The debtor files a petition with the bankruptcy court, listing the debtor’s assets, debt, liability, monthly income and monthly expenditures. A bankruptcy trustee is then appointed to the case, who is usually an attorney or an accountant appointed by the US Bankruptcy Court.
The trustee’s job, in part, will be to determine what assets of yours are exempt from proceedings, so they could not be legally taken, or liquidated, to pay off the creditors as much as possible. Each state has its own set of rules regarding what assets will be exempt, meaning what assets or property you will be allowed to keep up to a certain value, even though you are filing for bankruptcy.
Federal and State Exemptions
There are also federal exemptions, and some states will allow the debtor to use those as well. For example, here in New Jersey a single person who files for bankruptcy could be exempt up to $20,000 of equity in their home if they have it, plus miscellaneous costs including broker’s fees and things like that. Often that number could swell up to $30,000.
However, if you have property that clearly exceeds the exemption value - let’s say you have $80,000 of equity in your home and are unable to exempt that - then you could consider filing for Chapter 13. That’s because if you file for Chapter 7, the trustee could theoretically sell off your house and use that money to pay off your creditors.
