Of the 6 types of bankruptcy listed in the Bankruptcy Code, the two that are arguably most used by individuals are Chapter 7 Bankruptcy and Chapter 13 Bankruptcy.
What Is Chapter 7 Bankruptcy?
Chapter 7 Bankruptcy allows filers to discharge qualifying debts (including most forms of unsecured debt, such as medical bills, credit card bills, and personal loans). In exchange, the filer’s non-exempt property is liquidated to pay off their creditors. In New York, many types of property may be exempted from liquidation, such that some filers are able to keep their homes, cars, and most if not all of their property.
Chapter 7 is means-tested. In order to file for Chapter 7 Bankruptcy in New York, you must show that your income is under the median income for a family of your size in the same county where you live. In general, Chapter 7 is designed to work best for lower-income debtors with no substantial assets to lose. However, even if you do have assets that may be liquidated, Chapter 7 may be the right choice for you if it can erase more debt than any property loss it might cause.
What Is Chapter 13 Bankruptcy?
Unlike Chapter 7, which is a liquidation bankruptcy, Chapter 13 Bankruptcy is what is referred to as a “reorganization bankruptcy.” It is designed for debtors who have a substantial, regular source of income, but have gotten overwhelmed with unmanageable debt. It puts a stay in place, ceasing collections actions and fees as well as wage garnishment, litigation, and foreclosure.
This gives the debtor and the court time to put a repayment plan in place. According to this plan, the debtor will pay back their creditors over a period of time, usually between 3-5 years. The terms of the plan (i.e., how much you will be responsible for repaying, how many installments the payment can be made in, and how much time you have to complete the total payment plan) depend on a number of factors. These include how much you earn, how much property and how many assets you own, and the types and amount of debt that you owe. If the debtor stays current payments and completes the plan, their debt is considered discharged. If they do not, all collections actions may resume.
Chapter 13 Bankruptcy is generally best for debtors who do not pass the means test for Chapter 7 Bankruptcy (i.e., who make too much to qualify), but who still need relief from collections actions or wage garnishment. It is also useful for stopping foreclosure and litigation based on debt, and for paying back non-dischargable debt (such as child support arrears) over a period of 3-5 years rather than through lump sum payments or wage garnishment. The one major caveat for Chapter 13 is that in order to qualoify, debtors cannot have more than $419,275 in unsecured debt, or $1,257,850 in secured debt.
If you are considering filing for Chapter 13 or Chapter 7 Bankruptcy, it’s important to the find a knowledgeable, skilled, and experienced attorney. New York Bankruptcy Attorney Wayne Greenwald is ready to help. Call (212) 739-7599 for a free consultation today.
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