What is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?
If you are considering consumer bankruptcy in Florida, you likely are wondering whether you should file for Chapter 7 or Chapter 13 bankruptcy. These are the two most common types of personal bankruptcy, and both types of bankruptcy have benefits and limitations. At the same time, both types of bankruptcy also have eligibility requirements that a consumer must meet in order to file. Our Orlando bankruptcy lawyers want to provide you with more information about the differences between Chapter 7 and Chapter 13 bankruptcy to help you understand the options that may be available to you.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is what is known as a “liquidation” bankruptcy. This means that all of a debtor’s nonexempt assets will be liquidated in order to repay creditors. In a Chapter 7 bankruptcy, the debtor is eligible for a discharge of all eligible debts, which can give the debtor a fresh start financially. Florida has its own set of bankruptcy exemptions. Although some states allow debtors to choose between state and federal exemptions, debtors in Florida must use the Florida exemptions. While there are numerous exemptions—which prevent the exempt property from being liquidated—some of the most notable exemptions in Florida include:
- Homestead exemption, which allows debtors to exempt an unlimited amount of equity in a home;
- Motor vehicle exemption that allows debtors to keep up to $1,000 equity in a motor vehicle; and
- Wildcard exemption which allows debtors to exempt up to $4,000 worth of any personal property if the debtor does not use the homestead exemption.
While Chapter 7 is one of the more common types of consumer bankruptcy, it is not limited to consumers. To be sure, businesses also file for Chapter 7 bankruptcy. However, unlike businesses that seek a liquidation bankruptcy, consumers must meet certain eligibility requirements in order to file for Chapter 7 bankruptcy.
The eligibility requirements fall under what is known as the “means test.” This is a test that seeks to determine whether a consumer’s income is too high for Chapter 7 bankruptcy. Under the U.S. Bankruptcy Code, the means test calculates your disposable income by subtracting monthly expenses from your average monthly income over the six months prior to your decision to file for bankruptcy. If you have too much disposable income, you will not be able to file for Chapter 7 bankruptcy.
Chapter 13 Bankruptcy
If a consumer is not eligible to file for Chapter 7 bankruptcy, then Chapter 13 bankruptcy usually is the other option. In many cases, however, the consumer chooses to file for Chapter 13 bankruptcy instead of Chapter 7 bankruptcy. Chapter 13 bankruptcy is known as a “reorganization” bankruptcy. Rather than liquidating assets, a debtor comes up with a repayment plan to repay creditors over a number of years in regular installments. Once the repayment plan has been completed, any remaining debts that are eligible for discharge may be discharged.
Chapter 13 bankruptcy is often beneficial because it allows debtors to retain property and to get back on track with payments. It also can allow debtors to stop a foreclosure and to stay in their home. Like Chapter 7 bankruptcy, however, there are some eligibility requirements. Specifically, a consumer cannot have secured debts of $1,184,200 or more, or unsecured debts of $394,725 or more. If the debts are at or above those amounts, the debtor will need to consider Chapter 11 bankruptcy.
Contact an Orlando Bankruptcy Lawyer
If you have questions about the type of bankruptcy that is right for you, an Orlando bankruptcy attorney can help. Contact Anderson & Ferrin today for more information.