The way bankruptcy used to work 150 years ago is that they would take everything you owned including the shirt on your back and basically put it on your kitchen table, then sell it off and use the proceeds to pay your creditors. In the modern day bankruptcy world, you get what are called “exemptions,” which means you get to take stuff off the table, such as your watch, your clothes, a car and a certain amount of equity in your house. If you only have a certain amount of equity in your home, you can take your house off the table so that when you are done, there is nothing on the table to sell for the creditors. Hence, the creditors get nothing, you get to keep all of your stuff and all of your debts go away. That is the only way I have ever figured out how to explain exemptions. In California, there are two sets of exemptions, and the types of assets you have will dictate which set of exemptions I use. That is how the whole exemption thing works.
What Are the Differences Between Chapter 7 and a Chapter 13 Bankruptcy?
A Chapter 7 is a straight bankruptcy with which you get rid of all of your unsecured debt like credit cards, lawsuits, medical bills, collections and telephone bills, whereas Chapter 13 is a debt consolidation although it is really a plan of reorganization. The main purpose of a Chapter 13 is to reorganize your debts and arrange them so that you can make one payment and pay off your cars or pay off what you are behind on your house or pay off the IRS and just get yourself reorganized to the point that everything is under control and you are no longer getting harassed and life is no longer a nightmare.
Chapter 7 really is for people who just have unsecured debt which is debt for which there is no collateral, such as a credit card. A car loan is secured, because it has collateral, which is the car and if you do not pay the car loan every month, then the creditor can come and repossess it. A Chapter 13 is really geared for dealing with assets that are secured, whether it is your house, car or motorcycle, and dealing with tax problems and things like that. Chapter 13 also is for people who would like to file Chapter 7 but who make too much money.
Is It More Difficult to file a Chapter 7 Bankruptcy as Opposed to a Chapter 13?
Chapter 7 is a much simpler process and is easier to file. Chapter 13 involves doing a budget and creating a plan or reorganization. Chapter 7 is harder to qualify for since the Bankruptcy Reform Act of 2005 because they put in the means test such that if you make more than the median income for your location and your budget does not work out properly, then you cannot qualify to file a Chapter 7; you have to go into a Chapter 13.
The way Chapter 7 works is that you get rid of all of your debts and you keep all of your assets. The only assets that you do not keep are those you do not want. For instance, if you had a car loan with a 22% interest rate, you can surrender the car and walk away from it without having to pay it back.
How Long Does a Chapter 7 Bankruptcy Take to Discharge As Opposed to a Chapter 13?
Chapter 7 is pretty much done in 120-150 days from the date of filing; you go to your creditors meeting within about 30-40 days, then you have to basically just sit and wait; the creditors have a certain amount of time to file an objection, although they never do, and the trustee has to file their final report and the court has to process all of that. Once those time periods have expired, the court grants you a discharge. I always tell my clients to figure 150 days from the date that you file your case.
Chapter 13 is either a 3-year or 5-year process from start to finish. It is a 3-year process if you are under the median income or a 5-year process if you are above median income.
For more information on Bankruptcy Exemptions, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling (858) 278-2800 today.