What is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?

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Deciding whether or not to declare bankruptcy is never easy. If you’ve exhausted all other options and feel like you’re drowning in debt and unable to make ends meet, bankruptcy can be a way to end the vicious cycle.

Once you’ve made the decision to file for bankruptcy, it’s important to understand which option is best for you. Chapter 7 and Chapter 13 bankruptcy are the most common solutions for individuals. Understanding the difference between the two is important in determining what is the right approach for your situation.

What is Chapter 7 Bankruptcy?

Chapter 7 Bankruptcy can be used by individuals and businesses. This type of bankruptcy has income criteria and is sometimes referred to as a “liquidation bankruptcy,” although in the vast majority of cases nothing is liquidated. This is determined by looking at your assets and their value against the amounts the Bankruptcy Code will allow you to protect. The main benefit of Chapter 7 is that most unsecured debt, like medical bills, personal loans, payday loans, and credit cards, are eliminated without any additional payments to creditors.

Upon filing Chapter 7, an automatic stay order is entered, and all collection activity must cease, giving you the opportunity to breathe. A Chapter 7 case lasts about three to four months, and then if there is no objection, a debt discharge is entered. One of the biggest drawbacks of filing for Chapter 7 bankruptcy is that it will stay on a credit report for up to 10 years and can potentially lower credit scores, making it more difficult to buy. a house or a car without having a higher than normal rate. interest rate.

What is Chapter 13 Bankruptcy?

Unlike Chapter 7, Chapter 13 is only an option for individuals, or individuals doing business as sole proprietors versus a separate business entity. This type of bankruptcy reorganizes your debt into a repayment plan, including secured debts like mortgage arrears or car payments, as well as senior debts like overdue income taxes, while eliminating your unpaid debt. guarantees. Chapter 13 bankruptcy is generally intended for people who are in a situation where they have sufficient income to pay off some of their debt, but who may not be able to pay back on the original terms.

Debtors typically choose to file Chapter 13 bankruptcy because of certain advantages over filing Chapter 7. Chapter 13 does not require assets valued above bankruptcy code limits to be sold to repay the debt. creditors and may also allow debtors to modify certain secured debts like home equity mortgages and vehicles that are not worth their value, or at a high interest rate, in certain scenarios. The repayment plan is based on the person’s circumstances, such as income, current expenses, and the type of debt to be repaid. Ultimately, only one payment is made between the various creditors. The repayment plan is usually put in place for three to five years until all of the debt has been repaid. Bankruptcy will not be discharged until the repayment plan is completed.

Similar to Chapter 7, an automatic stay also occurs when filing a Chapter 13 case and can stop foreclosure sales, repossession or tax sale, as well as endless appeals from creditors.

Similar to Chapter 7, Chapter 13 can also affect credit scores. However, due to the commitment to a Chapter 13 repayment plan, some creditors view it more favorably than a Chapter 7 where the debt is forgiven. Chapter 13 Bankruptcy can stay on a credit report for up to 7 years.

When to hire a lawyer

Everyone’s situation is different, and what may have been the right choice for an acquaintance or family member may not be the best option for your situation. That is why it is always best to hire an experienced bankruptcy attorney to help you decide which path really fits your needs.

If you are feeling overwhelmed with debt, contact the team at Mette, Evans & Woodside for compassionate and experienced advice.

Author: Tracy Updike, Esq.

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