What’s the Difference Between Chapter 7 and Chapter 13 Bankruptcy in New York City?

There are numerous ways to file bankruptcy described under the various “chapters” of the US Bankruptcy Code.  The most common types of consumer bankruptcy we file in New York City are Chapter 7 and Chapter 13 cases.  Both of these bankruptcy types will eliminate debt and provide a fresh start, but there are some differences and advantages to each depending on your financial situation.

Unlike debt consolidation, or other debt relief schemes, bankruptcy is court ordered, and has the power of the US court system behind the discharge.  Settling debt other ways, or outside of the bankruptcy court system will have tax implications that can be avoided through bankruptcy.  Debt eliminated through bankruptcy has no tax ramifications, but debt that is settled in other ways will be treated as income by the IRS and taxed accordingly.

In general while both types of bankruptcy deal with eliminating debt, Chapter 13 usually gets rid of more.   Chapter 7 is best for consumers with large amounts of debt and few assets, or assets of relatively low value.  In a Chapter 7, a debtor’s non-exempt property is itemized and sold by the bankruptcy trustee as a way to repay the creditors in the case.  However, there are numerous exemptions available for a consumer’s property in New York, and our clients rarely lose their homes, cars or personal possessions in the bankruptcy process.  With the exemptions at play at the end of the day most Chapter 7 bankruptcies are considered no-asset cases, and as such the consumer usually receives a discharge of all or most of their debt while the creditor typically receives nothing.

Chapter 13 on the other hand is more suitable for debtors with considerable assets that need to be protected.  The Chapter 13 plan, also known as a “wage earners, or repayment plan” requires the debtor to repay a portion of their debt to their creditors- unlike a typical Chapter 7.  In a Chapter 13 a portion of your debt is paid to the bankruptcy trustee over a 3-5 year repayment period, to be distributed to your creditors.  While you are repaying some of your debt, Chapter 13 will also give you the ability to catch up on mortgage payments or rental arrears so as to avoid a foreclosure or eviction, protect rent stabilized apartments and catch up on car payments to prevent automobile repossession.  It can help eliminate a priority tax debt that would otherwise be non-dischargeable in a Chapter 7, and Chapter 13 can also help repay past due student loans, or even child support or alimony back payments as well.

All in all Chapter 13 can be the safest way to file bankruptcy.  Unlike a Chapter 7 which has no limits, there are statutory limits to the amounts of secured and unsecured debt that can be eliminated in a Chapter 13.  Nevertheless a Chapter 13 can offer the most protection for homes, cars, personal assets, and maybe most importantly, your loved ones.

Being at the center of the financial universe, New York City is especially strict in regards to its fraudulent conveyance laws.  If you have given money or repaid friends or family members in the last six years the bankruptcy laws of New York City may consider this a fraudulent conveyance.  Filing Chapter 13 may help solve this particular problem.  Your friends and family will not be sued, or your assets liquidated if the Chapter 13 was filed in good faith.

If you or a loved one needs bankruptcy protection the best thing to do is to consult with a qualified bankruptcy attorney than can walk you through the best options for your situation.  If you live in New York City please contact the Law Office of William Waldner online or at 212.244.2882 to arrange a free bankruptcy consultation today.  We only practice bankruptcy law, and maintain a 99% Chapter 7 bankruptcy discharge record in New York City as of 9/31/16.

This article is intended for educational purposes only.  By reading this no attorney-client privilege has been created.