What Is The Difference Between Chapter 7 and Chapter 13 Bankruptcy?

The most important decision you will have to make is whether you want to file Chapter 7 bankruptcy or Chapter 13. These chapters are sections of the United States Bankruptcy code that describe how your debt will be dealt with in each phase. 

Declaring bankruptcy can be a difficult decision that could have serious financial and credit implications. In addition, this is a complicated legal process requiring extensive research before deciding on the right course of action.

The decision of whether or not you choose to file a debt repayment or property plan will determine whether or not you are placed on one. To get an idea of the future, you can start by clicking here if you are at a crossroads.

What is the Bankruptcy Process?

Bankruptcy is an option to eliminate or reduce debt if you are unable to pay your creditors. However, this should only be considered a last resort and used only after exhausted all other options.

Most people who file bankruptcy are filing under Chapter 7 and Chapter 13. What happens to your property is the most important distinction.

Chapter 7 bankruptcy is also known as liquidation bankruptcy. This means that you must sell a portion or all of your assets to meet your obligations. This is often the best option if you don’t have a house or have a limited budget.

Chapter 13, also known as a Reorganization Bankruptcy, allows you to keep your property (including your vehicle and secured assets) as long as you follow a three to five-year court-mandated repayment program.

Depending on your marital status and where you live, you may be able to exclude some of your property from being auctioned. The exemption amounts are taken from your home equity, retirement funds or personal items, and the rest of the profits can be used to pay debts. This graphic will provide a quick overview of both the types and details about exemptions.

Chapter 7

Bankruptcy Types
  • Liquidation

Who is authorized to file?

  • Both individuals and businesses can be included in this category.

Eligibility restrictions

  • Chapter 7 means the test requires that disposable income be sufficiently low to pass.

What is the time it takes for a discharge?

  • It is common for three to five months.

What happens to a person’s property if they file for bankruptcy?

  • The trustee can sell any non-exempt property to satisfy creditors.

Can you remove junior liens from the real property by using lien stripping?

  • No

This allows you to reduce your principal loan amount for secured debts by cramming down.

  • No

Benefits

  • This allows debtors to quickly get rid of most debts and start over.

Drawbacks

  • The trustee may sell any not exempt property; it is impossible to make up missed payments to avoid foreclosure or repossession.

Chapter 13

Types of Bankruptcy

  • Reorganization

Who is authorized to file?

  • Only individuals (including sole proprietors) are eligible

Eligibility restrictions

  • As of 2021, it is illegal to have more than $419275 in unsecured debt and $1,257.850 in secured debt.

What is the time it takes for a discharge?

  • Once you have made all your plan payments (usually for three to five years),

What happens to a person’s property if they file for bankruptcy?

  • Debtors can retain all their property but must pay unsecured creditors a sum equal to the nonexempt value.

Can you remove junior liens from real property by using lien stripping?

  • Yes, provided that all requirements are met

This allows you to reduce your principal loan amount for secured debts by cramming down.

  • Yes, provided that all requirements are met

Benefits

  • This allows debtors to keep their homes and make up any non-dischargeable prior debt payments.

Drawbacks

  • For three to five years, the trustee must be paid every month. In some cases, the trustee may also require repayment of a portion of general unsecured debts.

What are the Bankruptcy Eligibility Guidelines?

Your income is the primary factor that will determine your eligibility. Your income determines eligibility will need to either have a lower than-median income or pass a means check to determine if you can reasonably expect to repay your obligations using your disposable income (money left over after paying for necessities).

If you aren’t eligible for Chapter 7, you will need to consider Chapter 13 bankruptcy. To follow this path, you’ll need to have a steady income and unsecured debts less than $419,275. You also need secured obligations not exceeding $1,257.850.

Would I be required to repay all my debts in Chapter 7 or Chapter 13 bankruptcy?

It varies depending on what type of debt is involved. For example, you won’t be required to pay unsecured debts that are not secured by collateral (e.g. credit card or medical payments).

These debts will be discharged with Chapter 7. This can take up to a few months. Chapter 13 requires that you continue to pay those amounts during your court-ordered repayment program. Unsecured debts can then be discharged.

However, certain debts cannot be discharged under Chapter 7 or Chapter 13 bankruptcy.

  • Mortgages
  • It doesn’t matter if it’s government costs or tax obligations.
  • Auto loans
  • Alimony or child support
  • Students can get financial aid in the form of student loans.

You may be able to reduce some of your secured loans through Chapter 13 bankruptcy. This is a way to make it easier to pay the debt. You may be eligible for a lower amount of auto loans depending on how much the vehicle has appreciated. 

You may be eligible to discharge secured debts such as auto loans if you sell the property in Chapter 7 bankruptcy. In this instance, the car.

What effect does bankruptcy have on credit?

Your credit score is affected by missed payments and large balances. Therefore, you may need to file bankruptcy if your credit is not in good standing. However, a bankruptcy will negatively impact your credit score and creditworthiness throughout your entire life. 

The effect will diminish as time goes by. For example, Chapter 7 bankruptcy can remain on your file for as long as ten years while Chapter 13 bankruptcy can be kept on your file for as long as seven years.

Your credit situation may not be perfect, but you can still take advantage of the extra time to manage your obligations and make timely payments. You can fix your credit with patience and effort. Also, bankruptcy can provide debt relief to help you get back on your feet financially.

What is the process for filing for bankruptcy?

It is a sad fact that bankruptcy can be costly. This is even more true if you hire legal representation. (Learn more below). All petitions must be filed in the U.S. bankruptcy courts. Filing fees for Chapter 7 are $335, and Chapter 13 is $310. 

However, you can petition the court for a waiver of your charge or allow you to make monthly payments. You will also need to take debtor education classes if you file your own case.

This is just the beginning. You will need to fill out a list of papers and a Chapter 13 repayment plan. Before accepting your plan, a court-appointed trustee reviews it and contacts your creditors. The filing of either file is not an easy task. Even small mistakes can jeopardize your case.

It doesn’t matter if you file for Chapter 7 or Chapter 13 bankruptcy, it is a smart idea to hire an attorney to help you with your petition.  lawyer will vary depending on your case’s complexity. 

Chapter 13 filings are the most costly, but that doesn’t mean you should not get one. Talk to potential attorneys to discuss payment arrangements. The cost of a bankruptcy You can also look for pro-bono lawyers in your area and legal aid agencies. Or, you can use an online service such as Upsolve.

Last Thoughts

Although bankruptcy may sound scary, it could be the best way to manage your finances and avoid further debt. No matter what the situation, it is important to seek professional assistance. 

Monitor your credit score before and after you declare bankruptcy. BankruptcyHQ’s credit monitoring service is free and can alert you to any changes in your credit score. This includes potential improvements after bankruptcy.

 

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