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Chapter 7 vs. Chapter 13 

Schwartz, Hanna, Olsen, & Taus, P.C. Dec. 21, 2022

woman filling in bankruptcy form and using calculatorWhen you are facing major financial difficulties, it is important to be informed of your legal options. Filing for bankruptcy could give you the fresh start you need to move forward with your life. There are advantages and disadvantages to the two primary types of bankruptcy: Chapter 7 and Chapter 13. Work with an experienced bankruptcy attorney to seek debt relief and protect your financial future.  

At Schwartz, Hanna, Olsen, & Taus, P.C., we have over 80 years of combined experience that we will use to help you achieve the best possible outcome. We will guide you through your unique situation and through each step of the bankruptcy proceedings. If you’re located in the New Jersey areas of Somerset, Morris, Passaic, Essex, and Bergen counties, or anywhere else in the state, contact Schwartz, Hanna, Olsen, & Taus, P.C. to learn more about your bankruptcy options. 

Chapter 7 Bankruptcy 

Chapter 7 bankruptcy is a type of consumer bankruptcy that allows individuals to gain a fresh start in their financial life. It is sometimes referred to as “liquidation” bankruptcy because it allows individuals to eliminate most of their unsecured debts. In a Chapter 7 bankruptcy, the individual will lose some assets, such as second vehicles, second homes, stocks, etc., which will be sold by a trustee.   

Who Qualifies for Chapter 7? 

To qualify for Chapter 7 bankruptcy, you must not have had your debts discharged in bankruptcy in the last six to eight years, and your gross income must be lower than New Jersey’s median income.  

However, if your income is higher, you may still be able to qualify for Chapter 7 bankruptcy by passing a means test. In this test, all of your income and assets will be added up, and then all of your expenses, as allowed by New Jersey law, will be deducted. If you do not have enough assets remaining to restructure your debt and pay it off under Chapter 13, you can file for Chapter 7.  

What Chapter 7 Can and Cannot Do 

Chapter 7 discharges your unsecured debts, such as credit card and medical debt. Under this chapter, some of your assets may be sold to help pay your debts if they are not considered exempt.  

Chapter 7 bankruptcy cannot discharge child support, spousal support (alimony), or taxes. In almost all cases, Chapter 7 bankruptcy cannot discharge student loan debt. Additionally, if there is any fraudulent debt, such as spending recklessly on a credit card knowing that it would be discharged in bankruptcy, Chapter 7 cannot discharge that debt.  

When Is Chapter 7 a Good Option? 

There are many circumstances where Chapter 7 bankruptcy is a good option. If you are consistently making large payments on your debts, or if you can only make the minimum payment on your debt month to month, consider filing. Also, if your debt is causing you to abuse alcohol or drugs, consider speaking to a bankruptcy attorney.  

Similarly, if a judgment can be brought against you – for instance, if a hospital can file a judgment against you for hospital bills and attorney’s fees – then you should file for bankruptcy before the judgment is secured. Bankruptcy cannot discharge debt from a judgment. 

Chapter 13 Bankruptcy 

Chapter 13 bankruptcy is unlike Chapter 7 bankruptcy because it focuses on the individual restructuring their debt and repaying it through a payment plan. It stops creditor harassment, and all creditors are repaid with one monthly installment plan. The repayment plan will be for at least three years and no more than five years.  

Who Qualifies for Chapter 13? 

Most people can qualify for Chapter 13 bankruptcy. The individual’s unsecured debt must be less than the amount set by law, approximately $394,725. The individual’s secured debt must be less than approximately $1,184,200.  

Also, the individual must complete the required credit counseling course and file bankruptcy within 180 days of finishing the course. 

There are situations that disqualify an individual from filing. If an individual has failed to comply with court orders in the past 180 days, or if they had a bankruptcy petition that was dismissed in the past 180 days, then they must wait until 180 days have passed to file for bankruptcy. 

What Chapter 13 Can and Cannot Do 

Chapter 13 offers some key advantages. Chapter 13 protects against home foreclosure and may protect co-signers. Individuals will have no direct contact with creditors under Chapter 13.  

While Chapter 13 cannot make your financial problems disappear or liquidate all your debt, it can give you a fresh start while allowing you to retain many of your assets. 

When Is Chapter 13 a Good Option? 

Chapter 13 is a preferable option for those who want to keep their personal property, such as their home and vehicle, and for those who earn an income that disqualifies them from Chapter 7 bankruptcy. It ends creditor harassment and can often be a better route than debt settlement programs. 

Getting the Legal Guidance You Need 

Understanding which chapter of bankruptcy to file for debt relief can be a challenging process. By working with an experienced bankruptcy attorney, you can weigh all your options and determine the best path forward for your unique financial situation.  

At Schwartz, Hanna, Olsen, & Taus, P.C., we focus on giving each of our clients personalized attention and assertive legal advocacy. We will advise you on the right chapter to file and guide you through every step of the bankruptcy proceedings.  

If you’re located in the New Jersey areas of Somerset, Morris, Passaic, Essex, and Bergen counties, or anywhere else in the state, contact Schwartz, Hanna, Olsen, & Taus, P.C. to schedule a free consultation.