Choosing Which Chapter is Better for You
If you are in serious financial trouble, bankruptcy might be the best solution. While it is a serious measure that should never be taken lightly, it is a legitimate way for good people who have fallen on hard times to receive a sort of reset. This allows you to rebuild a healthy financial future. Consumer bankruptcies fall into two categories: Chapter 7 and Chapter 13. Which to choose depends largely on your overall financial picture and the types of debt you have. Let’s briefly go over the chapters to gather a general understanding of each.
Chapter 7 Bankruptcy
Chapter 7 is what most people think of when they hear the word bankruptcy. Chapter 7 wipes out most of your unsecured debt. Some things are generally not dischargeable, such as child support, student loans, and some tax liabilities, but the vast majority of your consumer debt, including medical debt, is permanently cleared.
If you have secured property such as a house with a mortgage or a car loan, you have a choice. You can declare the debt as part of the bankruptcy, which alleviates the debt but requires you to surrender the property. Your other option is to continue paying the secured debt. This means that you keep the property, but you also keep the debt. Since you will not be able to file for Chapter 7 bankruptcy again for eight years, if you later default and stop paying, you can lose the property. If you have enough cash, you may also be able to redeem the item by paying off its full fair market value.
In 2005, federal legislation was passed that requires Chapter 7 filers to pass a means test. This is designed to weed out fraudulent debtors who abuse the system, but generally has little effect on honest borrowers who are trapped under a mountain of debt. You might qualify solely based on your household income, or you might be required to fill out a longer form detailing your monthly expenses.
In a Chapter 7 bankruptcy, your nonexempt property can be sold, but this is very uncommon. Over 97% of bankruptcy cases have no property was taken which means that most people lose nothing at all. It is common for people to worry that this means they will lose their possessions. In reality, however, every state provides exemptions for a certain amount of equity in your home and car, as well as an allotment for personal property. There are also Federal exemptions. Most people will lose nothing at all.
Chapter 13 Bankruptcy
If you are unable to pass the means test or do not want to file Chapter 7, you can file for Chapter 13 bankruptcy instead. In Chapter 13, your debts are not wiped out. Instead, they are restructured based on your monthly income and expenses, and your ability to repay. The specifics vary according to your particular case, and in some cases, you might only be required to pay a very small amount of what you owe.
Chapter 13 is open to all debtors, even those who do not pass the Chapter 7 means test. You are allowed to keep all of your property. In addition, Chapter 13 may be the best option if you are behind on your mortgage or car payments. It will provide you an automatic stay on collection efforts and give you the opportunity to get caught up. Chapter 13 also allows you to include back taxes and other types of debt that are excluded from Chapter 7 bankruptcy. Keep in mind, however, that Chapter 13 bankruptcy requires a 36-60 month payment. If you are eligible for Chapter 7 and do not have a specific reason to file Chapter 13 instead, Chapter 7 allows you to get your fresh start in just a few months.
When to Choose Chapter 13 Over Chapter 7
When a person begins to consider bankruptcy, they often spend most their time and energy on Chapter 7. They are familiar with the benefits, including the ability to have some or all of their debt discharged.
But did you know there are quite a few benefits associated with Chapter 13? In fact, there are so many that you may begin to realize this is the better option. With the help of a Chapter 13 bankruptcy plan, you are able to repay creditors through a repayment plan that typically lasts three to five years. You will feel much better once you come out the other side, as your debt will be cleared and you are able to move forward with your finances in order. While many people understand the benefits of a Chapter 13 bankruptcy plan, others shy away from this because they believe Chapter 7 is the better option.
Here are several reasons why you should consider Chapter 13:
You don’t qualify for Chapter 7.
If you have too much money, Chapter 7 is out of the question. But just because you cannot move forward with that type of filing does not mean you are left out in the cold. Chapter 13 may be considered a “plan B” for some, but it is still effective.
You have non-exempt property that you do not want to lose.
Even though most people who file Chapter 7 are in a position to keep the majority of their assets, there may be some type of non-exempt property that is not protected. With Chapter 13, you don’t have to concern yourself with this. As long as you continue to make payments through your repayment plan, your property is safe. A Chapter 7 filing allows you to keep the exempt property. The same does not hold true for the nonexempt property. If you want to keep all your property, Chapter 13 is the better route. With this type of filing, you don’t have to give up anything. How does that sound to you?
Better chance of stopping foreclosure and keeping your home.
Both Chapter 7 and Chapter 13 will temporarily stop a foreclosure. However, Chapter 7 allows you to make up missed payments as part of your payment plan. This ensures that you can stay in your home.
You want to face your debt and pay it off.
While some people have no problem discharging as much debt as possible through Chapter 7, others feel poorly about doing so. They borrowed the money and now they want to pay it back. With Chapter 13 bankruptcy, you will pay back your creditors through a repayment plan. This is in contrast to a Chapter 7 filing in which some or all of your debt is discharged. If you have a moral desire to do the right thing, this is the way to go.
Very rarely will someone want to pay back creditors through a Chapter 13 repayment plan, but in the long run, this will improve your outlook. It gives you the opportunity to better understand your finances while learning what it takes to stay on track. Best yet, some plans only last three years, which is not long when you consider the overall picture.
You are behind on a car payment or mortgage.
With Chapter 7, you don’t have the ability to make up missed payments over an extended period of time. With Chapter 13, however, the repayment plan will work in your favor. This payment plan typically lasts three to five years.
Bankruptcy protection is a valuable tool for honest debtors who have run into unexpected financial trouble. However, it is not a one size fits all solution. Regardless of which type of bankruptcy you file, you may have difficulty obtaining good credit at low-interest rates for a few years. Still, while it can remain on your credit report for 10 years, bankruptcy does not completely wipe out your ability to establish new credit. Put a solid financial plan in place, resist the urge to use credit when not absolutely required, and you will be on your way to regaining your financial footing.
A bankruptcy attorney can advise what is best for you in your specific situation. He or she can guide you as to what is best for making your life simpler and better in the shortest period of time. Your attorney can also walk you through the pros and cons of Chapter 7 and Chapter 13 in regards to your personal financial picture, and help to ensure that you make the right decision for you. The attorney can also give you the peace of mind that every person desires to have.
If you are ready to take the first steps toward financial freedom, call The Law Offices of David M. Offen today at (215) 625-9600 to schedule your free initial consultation. We’re here to help you every step of the way.