Chapter 7 vs. Chapter 13: Norwalk Bankruptcy Lawyer

One of the most common questions our Norwalk clients have when we first meet them is "What is the difference between Chapter 7 and Chapter 13 bankruptcy?" At the Law Office of Raymond J. Seo, we have counseled dozens of clients on the differences between Chapter 7 liquidation and Chapter 13 reorganization en route to deciding which option is best for their current situation.

The Means Test and Reorganization

Chapter 7 bankruptcies are reserved for those debtors who have primarily consumer, unsecured debt and which fall below a predetermined amount of earned income each year. Chapter 7 employs a "means test" to determine if you are eligible for filing under its rules. Each state has a median income stated in its rules which determines whether or not the debtor can even file under Chapter 7. Generally your income must fall below the state median income.

In California, the state median income for individuals is $47,798. If your yearly income falls below the median income, you are eligible to file for Chapter 7 protection. Chapter 7 will enable you to have your debts discharged, so they are no longer collectable by your creditors or any third party debt collector, and still keep many of your most important assets.

Chapter 13 bankruptcies are for those debtors who earn more than the state median income. A chapter 13 filing can allow the debtors to reorganize their debts and often renegotiate the amount due and owing, and by entering into a plan of payments that they can afford. The bankruptcy will discharge your debts after you have successfully completed the court approved payment plan. It makes it possible for you to pay them off over a period of 3 to 5 years and still keep all of your assets.