If you are thinking about bankruptcy in California, the first question is usually which chapter to file. For most individuals and families, the choice is between Chapter 7 and Chapter 13. Both stop collection activity the day you file, but they work very differently.

What Is Chapter 7 Bankruptcy?

Chapter 7 is often called “straight” or “liquidation” bankruptcy. It wipes out most unsecured debts, such as credit cards, medical bills, personal loans and old utility bills. A typical Chapter 7 case takes about four months from filing to discharge.

A trustee reviews your case and can sell property that is not protected by an exemption. In practice, most of our Chapter 7 clients keep everything they own, because California’s exemptions protect things like household goods, clothing, retirement accounts, a vehicle up to a set value, and in many cases equity in a home.

Who Qualifies for Chapter 7?

To file Chapter 7 you must pass the “means test.” If your household income is below the California median income for a household of your size, you generally qualify. If it is above the median, a second calculation looks at your actual expenses to see whether you have money left over to repay creditors.

What Is Chapter 13 Bankruptcy?

Chapter 13 is a repayment plan. You make one monthly payment to the Chapter 13 trustee for three to five years, and at the end most remaining unsecured debt is discharged. Chapter 13 is often the better choice if you:

• Are behind on your mortgage and want to stop a foreclosure and catch up over time
• Are behind on a car loan and want to keep the car
• Earn too much to qualify for Chapter 7
• Have property or home equity that would not be fully protected in Chapter 7
• Owe certain tax debts or support arrears you need time to pay

Chapter 7 vs. Chapter 13 at a Glance

• Length: Chapter 7 is usually about 4 months. Chapter 13 lasts 3 to 5 years.
• Payments: Chapter 7 has no repayment plan. Chapter 13 requires a monthly plan payment.
• Home in foreclosure: Chapter 7 can delay a sale. Chapter 13 can let you cure the missed payments and keep the home.
• Income limits: Chapter 7 requires passing the means test. Chapter 13 requires enough income to fund a plan.

How Each Chapter Affects Your Credit

A Chapter 7 filing can stay on your credit report for up to 10 years, and a Chapter 13 for up to 7 years. Many people are surprised to find their score begins to recover within a year or two after discharge, because their debt load is gone and they can start building positive history again.

Talk to an Orange County Bankruptcy Attorney

Every situation is different, and the right choice depends on your income, your property and your goals. Call Madaen Law at (714) 782-7275 or send us a message for a free consultation. We help clients throughout Orange County, Los Angeles County and San Diego County.