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 non–bankruptcy 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|