Chapter 7 vs. Chapter 13 Consumer Bankruptcy

I. Why File?

  • a. Stop harassing phone calls;
  • b. Reorganize debt with light at end of tunnel via court order;
  • c. Protect assets;
  • d. Get a fresh start;

II. Downsides to filing- credit score ending up in the 500 to 550 range and on credit report for 7 to 10 years

III. Who Can File-

  • a. Ch. 7- individuals and corporations (those that are wound down);
  • b. Ch. 13- only individuals

IV. Who is entitled to a discharge- only individuals

V. Which Chapter to file- 7 or 13

  • A. Ch. 7-
1. Typically reserved for consumers with little assets and insufficient net disposable income via the means test to discharge consumer debt
  • B. Ch. 13-
1. Typically reserved for consumers who have disposable income via the means test, non exempt assets, nondischargeable debts to be reorganized and assets to cram down or lien strip

VI. Dischargeable debts-

  • a. Credit card debts, legal debts, medical debts, department store debts that are not purchase money security interest, deficiency balances from foreclosures and repossessions and older personal income taxes if test is met

VII. Nondischargeable debts-

  • a. Recent taxes, payroll taxes, debts owed to other governmental entities, certain torts and most student loans

VIII. Exempt Assets (examples)

Homestead 704-

  • 1. $50,000 single
  • 2. $75,000 married
  • 3. $150,000 65 or older or disabled

Wildcard 703- $19,675

Vehicle- $2,975

Jewelry- $1,225

Life Ins.- $9.975

Pers. Inj.- $18,675

IRA, 401k, pensions- unlimited

HYPOTHETICAL # 1

Harry and Wanda have net disposable income of $5,000 per month and necessary living expenses of $4,999. They are renters. Wanda has a 401k from Biz Co. of $50,000. Their consumer credit card debt is $50,000. What chapter should they file?

Answer Ch. 7 ______ Ch. 13 ______

HYPOTHETICAL # 2

Harry and Wanda have net disposable income of $5,000 per month and necessary living expenses of $4,200 per month. They are renters. Wanda has a 401k from Biz Co. of $50,000. Their consumer credit card debt is $50,000. What chapter should they file?

Answer Ch. 7 ______ Ch. 13 ______

HYPOTHETICAL # 3

Harry and Wanda have net disposable income of $5,000 per month and necessary living expenses of $4,200 per month. They are renters. Wanda has a 401k from Biz Co. of $50,000. Their consumer credit card debt is $50,000. Harry has a car he bought 3 years ago that is worth $5,000 and he owes $12,000. What chapter should they file? Can he cram down the car into the plan?

Answer Ch. 7 ______ Ch. 13 ______

HYPOTHETICAL # 4

Harry and Wanda have net disposable income of $5,000 per month and necessary living expenses of $4,200 per month. They are home owners. Their house has a current fair market value worth $400,000 with $410,000 owed on the first mortgage and $150,000 owed on the 2nd mortgage. Wanda has a 401k from Biz Co. of $50,000. Their consumer credit card debt is $50,000. What chapter should they file? What do they do about the 2nd mortgage?

Answer Ch. 7 ______ Ch. 13 ______

HYPOTHETICAL # 5

Harry and Wanda have net disposable income of $5,000 per month and necessary living expenses of $4,200 per month. They are home owners. Their house has a current fair market value worth $400,000 with $490,000 owed on the first mortgage and $150,000 owed on the 2nd mortgage. Wanda has a 401k from Biz Co. of $50,000. Their consumer credit card debt is $50,000. Their Internal Revenue Service debt is $20,000 with $10,000 from tax year 2006 and $10,000 from tax year 2005. What chapter should they file? What do they do about the 2006 taxes? What do they do about the 2005 taxes? What do they do about the 1st mortgage?

Answer Ch. 7 ______ Ch. 13 ______

HYPOTHETICAL # 6

Harry and Wanda, both under the age of 65 and not disabled, have net disposable income of $5,000 per month and necessary living expenses of $4,200 per month. They are home owners. Their house has a current fair market value worth $400,000 with $300,000 owed on the only mortgage. Wanda has a 401k from Biz Co. of $50,000. Their consumer credit card debt is $50,000. They are 6 months behind in their mortgage payments of $1,400 per month. Harry has back due alimony owed to Sheila of $10,000. What chapter should they file? What do they do about the mortgage arrears? What do they do about the back due alimony? Can they protect their house? How much are the credit cards going to get in the plan?

Answer Ch. 7 ______ Ch. 13 ______

Thank you for your attention

Lindsey B. Green, Esq.