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The Difference Between Chapter 7 and Chapter 13 

Kenneth H.J. Henjum Law Office Jan. 17, 2024

Man Sitting on the floor Stressed Looking at BillsNavigating bankruptcy proceedings can feel like walking through a maze blindfolded, especially when you're already dealing with the stress of financial struggles. We understand that it's a challenging time, filled with uncertainty and worry. However, remember that bankruptcy isn't the end—it’s a new beginning, a chance to regain control of your finances and move forward. 

At the Kenneth H.J. Henjum Law Office, we are committed to guiding you through this process, providing personalized and effective solutions to your unique financial situation.

Understanding the Basics of Bankruptcy 

When it comes to understanding bankruptcy, it's crucial to remember that it's not a sign of failure or defeat—it's a tool designed to help individuals and families regain control of their financial lives. The idea of filing for bankruptcy can be daunting, but when used correctly, it can provide much-needed relief from crippling debts and offer a path to a brighter financial future. 

Chapter 7, Chapter 11, and Chapter 13 are the most common forms of bankruptcy filed by individuals, families, and businesses. Each one serves a different purpose and has different requirements. For example, Chapter 7, often referred to as "liquidation bankruptcy," may involve selling off non-exempt assets to pay creditors. Chapter 13, on the other hand, is often called a "wage earner's plan" because it allows individuals with regular income to create a plan to repay all or part of their debts over time. 

Choosing the right chapter to file under will depend on your personal financial situation. 

Chapter 7 Bankruptcy: The Liquidation Option 

Often referred to as liquidation bankruptcy, Chapter 7 is designed for those with limited income and few assets. This form of bankruptcy allows you to eliminate most unsecured debts, such as credit card balances and medical bills, through a relatively quick process. Keep in mind, though, that a trustee may sell non-exempt assets to repay creditors. 

Protecting Your Assets in Chapter 7 

One of the main concerns for people considering Chapter 7 is the potential loss of assets. However, California law provides significant protection for essential assets. For instance, homeowners can exempt up to $600,000 of equity in their homes, and retirement accounts are generally safe. Our team will help you understand the specific exemptions available to you. 

The Benefits of Chapter 7 Bankruptcy 

Chapter 7 bankruptcy, often referred to as "liquidation bankruptcy," provides several advantages that can offer a lifeline to those grappling with overwhelming debt. While it might seem intimidating, it's important to remember that this option is designed to help you regain financial stability and start afresh.  

Here are some key benefits of filing for Chapter 7 bankruptcy: 

  • Quick Discharge of Debts: One of the most significant benefits of Chapter 7 is the ability to discharge qualifying debts swiftly. In most cases, you can receive a discharge within three to four months of filing, allowing you to get back on your feet quickly. 

  • Retention of Exempt Property: California law allows you to keep certain exempt property, such as your home, insurance policies, retirement plans, personal belongings, public benefits, and tools used for your job. We'll work together to ensure you're able to retain as much of your property as possible. 

  • Automatic Stay: Once you file for Chapter 7 bankruptcy, an automatic stay order comes into effect. This means most creditors are legally prevented from pursuing further collection efforts. This can provide immediate relief from harassing phone calls and threatening letters. 

  • Fresh Start: Perhaps the most valuable benefit of Chapter 7 is the opportunity it provides for a fresh start. By discharging qualifying debts, you're given the chance to rebuild your financial life without the burden of insurmountable debt. 

However, it's also essential to consider potential drawbacks, such as the potential loss of nonexempt property and the inability to catch up on missed payments to avoid foreclosure or repossession. We're here to help you navigate these complexities and make the best decision for your financial future. 

Chapter 13 Bankruptcy: A Repayment Plan 

Chapter 13, or the wage earner's plan, is suitable for individuals with regular income who wish to repay their debts over time. It provides a structured plan for repaying a portion of your debts while allowing you to retain your assets. 

Understanding the Repayment Plan in Chapter 13 

In Chapter 13, you propose a repayment plan based on your disposable income. This plan, once approved by the court, outlines how you'll repay creditors over a set period. Our attorney will guide you through this process, ensuring that your plan is fair and manageable. 

The Benefits of Chapter 13 Bankruptcy 

Chapter 13 bankruptcy, also known as the "wage earner's plan", offers a lifeline to individuals, families, and sole proprietors grappling with debt. This form of bankruptcy provides structure and flexibility, allowing you to regain control of your financial situation. 

Here are some key benefits of filing for Chapter 13 bankruptcy: 

  • Reorganization Plan: Chapter 13 allows you to create a reorganization plan to pay back your obligations using your disposable income. This means you can manage your debts in a structured, affordable way over a period of three to five years. 

  • Retention of Assets: Unlike Chapter 7, Chapter 13 allows you to retain your assets while you work through your repayment plan. This means you can keep your home and car as long as you continue making payments. 

  • Discharge of Debts: At the end of your repayment plan, all unsecured debts are discharged, even if they've only been partially repaid. This provides a light at the end of the tunnel, knowing that you'll be free from these debts once your plan is completed. 

  • Automatic Stay: Just like Chapter 7, filing for Chapter 13 triggers an automatic stay. This halts most collection efforts from creditors, providing immediate relief from harassing calls and letters. 

  • Opportunity to Catch Up: Chapter 13 offers the chance to catch up on missed mortgage or car loan payments. This can prevent foreclosure or repossession, allowing you to maintain stability during your repayment period. 

However, it's important to note that Chapter 13 requires a commitment to a long-term repayment plan. It's crucial to ensure that the plan is manageable and fits within your budget.  

Discover What's Best for You  

Bankruptcy, while challenging, can be a path towards financial liberation. At the Kenneth H.J. Henjum Law Office, we're committed to making this journey as smooth as possible. We understand the complexities of bankruptcy law and are here to guide you every step of the way—whether you're considering Chapter 7 or Chapter 13 bankruptcy. Contact us today for a free consultation, and let's start your journey toward financial freedom together. 

Our attorney, Kenneth H.J. Henjum, represents clients in Ventura, California, and across Carpinteria, Santa Barbara, Lompoc, Santa Maria, and Paso Robles.