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The Difference Between Chapter 7 and Chapter 13

Law Offices of Herbert K. Ryder LLC June 11, 2024

Stressed man with petition to file for bankruptcyDealing with bankruptcy and its legal aspects can be challenging. If you’re having trouble choosing between Chapter 7 and Chapter 13, you've come to the right place. 

Herbert Ryder, the founding attorney at the Law Offices of Herbert K. Ryder, has over fifteen years of expertise in bankruptcy law, creditors' rights, and business workouts and repositioning. Herbert aims to educate his clients and provide them with the knowledge needed to make informed decisions.  

Read on to understand the key differences between Chapter 7 and Chapter 13 bankruptcy so you can determine which option might be right for you. 

What Is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy, often referred to as "liquidation bankruptcy," is designed for individuals who cannot repay their debts.  

Here's a breakdown of how it works: 

  • Means test: To qualify for Chapter 7, you must pass a means test, which compares your income to the median income in New Jersey. If your income is lower, you are eligible. 

  • Liquidation: Non-exempt assets (those not protected by bankruptcy exemptions) are sold to repay creditors. 

  • Discharge of debts: Most unsecured debts, like credit card debt and medical bills, are discharged, meaning you are no longer legally required to pay them. 

  • Timeline: The process typically takes around 4 to 6 months from filing to discharge. 

  • Eligibility for exemptions: Certain assets like your home, car, and personal belongings may be protected under state and federal exemptions. 

  • Credit impact: While Chapter 7 bankruptcy can stay on your credit report for up to 10 years, it can provide a fresh start by eliminating overwhelming debt. 

  • Access to legal help: Legal guidance is highly recommended to ensure proper filing and to maximize the benefits of bankruptcy law. 

  • Automatic stay protection: Filing for Chapter 7 initiates an automatic stay, which halts most collection actions against you, giving you temporary relief from creditors. 

Chapter 7 can provide a fresh start, but you must understand what you may lose in the process. 

What Is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy, also known as "reorganization bankruptcy," is for individuals with regular incomes who need to repay their debts over time.  

Here's how it works: 

  • Repayment plan: Based on their income and debt levels, debtors propose a 3—to 5-year repayment plan. 

  • Keep your assets: Unlike Chapter 7, you can keep your property, including your home and car, while repaying debts under the court-approved plan. 

  • Debt limits: There are limits to the amount of secured and unsecured debt you can have to qualify for Chapter 13. 

  • Discharge of debts: At the end of the repayment period, remaining eligible debts are discharged. 

  • Automatic stay: Filing for Chapter 13 initiates an automatic stay, which stops most collection actions, foreclosures, and repossession efforts. 

  • Co-debtor stay: This offers protection to co-signers or co-debtors, preventing creditors from harassing them while the repayment plan is in place. 

  • Adjustable payments: Payments are often adjusted based on your changing financial circumstances, allowing flexibility in your repayment plan. 

  • Prioritization of debt: Payments are made to creditors in a specific order, with priority debts like taxes and child support paid first. 

  • Credit impact: Chapter 13 remains on your credit report for up to 7 years, but regular payments can help rebuild your credit over time. 

  • Legal assistance: Filing for Chapter 13 can be complicated, and the advice of a qualified attorney is necessary to form and execute a successful repayment plan. 

  • Avoidance of future bankruptcy: Successfully completing a Chapter 13 repayment plan may help you avoid the need for future bankruptcy filings by establishing better financial habits and managing debt responsibly. 

Chapter 13 can be beneficial if you have assets you want to protect or if you need more time to catch up on missed mortgage or car payments.  

Bankruptcy Laws in New Jersey 

When filing for bankruptcy in New Jersey, there are specific laws and exemptions you will need to consider: 

Homestead Exemption 

In New Jersey, there is no specific homestead exemption. However, you can use federal exemptions to protect the equity in your home. 

Personal Property Exemptions 

New Jersey allows exemptions for personal property, including clothing, furniture, and household goods, up to a certain value. 

Wildcard Exemption 

A wildcard exemption allows you to protect other property not covered by specific exemptions, giving you more flexibility. 

Vehicle Exemption 

New Jersey does not have a specific vehicle exemption. However, you can utilize federal bankruptcy exemptions to protect the equity in your car. 

Tools of the Trade Exemption 

Tools and implements necessary for your trade or profession are exempt up to a certain value, allowing you to continue working and generating income. 

Wages Exemption 

A portion of your wages earned but not paid as of the filing date can be exempt so that you retain some income for living expenses. 

Public Benefits Exemption 

Public benefits such as Social Security, unemployment compensation, and disability benefits are exempt from bankruptcy proceedings. 

Retirement Accounts 

Most tax-exempt retirement accounts, including 401(k)s, IRAs, and Roth IRAs, are protected under federal law, ensuring that your retirement savings are secure in New Jersey. 

Consult a Bankruptcy Lawyer in Somerville, New Jersey

Attorney Herbert K. Ryder believes in the power of education. Herbert doesn't just tell you what to do; he explains why, so you understand every step of the process. This knowledge empowers you to make better financial decisions in the future. 

If you need the services of a bankruptcy lawyer in Somerville, New Jersey, or the nearby communities of Clinton, Brunswick, Princeton, or Woodbridge, call the Law Offices of Herbert K. Ryder and schedule a consultation.