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Individual Bankruptcy Filings

Individual Bankruptcy Filings: Chapter 7 vs. Chapter 13 [2020-05-08 APD Rev.] 

 

Under the Bankruptcy Code, individual debtors have different options when seeking bankruptcy protections: chapter 7 and chapter 13.  Chapter 7 is a liquidation bankruptcy which wipes out most of an individual filer’s unsecured debts, such as credit cards and medical bills.  Generally, chapter 7 protections are available to low-income debtors with little to no assets (including business entities) After filing, a chapter 7 debtor is protected by the automatic stay, which immediately stopes most creditors from undertaking collection efforts.  A trustee is appointed to administer the chapter 7 case, and the trustee reviews the debtor’s filings and facilitates the sale of any non-exempt property to pay creditors.   

 

By contrast, a chapter 13 bankruptcy is a reorganization for debtors with regular income who have enough assets to enter into a repayment plan for their creditors.  Chapter 13 filings are traditionally available to debtors who make too much money to qualify for a chapter 7.  Additionally, chapter 13 bankruptcies have multiple distinctions from chapter 7 filings: only an individual or a sole proprietor may file for chapter 13 protections and, importantly, debtors may keep their nonexempt property (provided creditors are paid the equivalent value of that property).   

 

In Nevada, common exempted property includes homestead value (up to $605,000 in equity in a home), a motor vehicle (up to $15,000 in equity), public benefits (including unemployment, social security payments, public retirement benefits, and the like), income and wages (the greater of 75% of wages, or 50 times the federal minimum wage), personal property (including one firearm and capped equity in art, jewelry, furniture, appliances, and equipment for home and professional use), and a $10,000 “wildcard” exemption for otherwise nonexempt property.  While some states allow debtors to choose between default federal Bankruptcy exemptions or those recognized by their state, Nevada residents filing for chapters 7 or 13 protections must use Nevada exemptions in concert with applicable federal nonbankruptcy exemptions.   

 

The primary differences between chapter 7 and 13 bankruptcies are summarized below: 

 

 

DISTINCTION    CHAPTER 7  CHAPTER 13 
       
Type of filing     Liquidation  Reorganization  
Filer eligibility    Individuals and business entities    Individuals and sole proprietors  
Filing restrictions     Disposable income must pass the chapter 7 “Means Test”   Must not exceed approximately $420,000 of unsecured debt or $1250,000 of secured debt  
Timing to discharge    Varies by debtor, typically 3-4 months after filing  Upon completion of all plan repayments, typically around 3-5 years after filing  
Reduction in secured debt loan balances    As to personal property collateral though redemption   May reduce loan balances to market value if cramdown requirements are satisfied   
Effect on personal property    Trustee can sell all nonexempt property to pay creditors   Debtors may retain nonexempt property, but must pay unsecured creditors the equivalent value   
Effect on real property    No removal of junior, unsecured liens   May remove junior, unsecured liens from property if stripping requirements are satisfied   

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