So you want to file bankruptcy, but you aren’t sure if Chapter 7 or 13 is right for you? It is not unusual for people with debt problems to wonder which kind of bankruptcy case they should file, either Chapter 7 or Chapter 13.
The truth is that there are many factors involved in answering this question, all of which will depend on the individual’s circumstances. This short article explains some of the differences between the two kinds of cases and may help readers decide which option is right for them. However, it is best to consult a reliable bankruptcy attorney in Georgia to answer any other questions you may have about both chapters.
Chapter 7 Bankruptcy or Chapter 13
In Chapter 7, you seek the court to forgive most of your debts. In return for this discharge, the designated bankruptcy trustee (and independent arbitrator) may sell any non-exempt property you hold and distribute the money to your creditors.
In essence, Chapter 13 is a repayment plan filed with the bankruptcy court to pay back all or part of your obligations over time. The amount you must pay depends on your income, debts, and property.
Chapter 13 lets you retain your property since you can pay back your debts with your income, but Chapter 7 enables you to choose from a list of state exemptions.
Chapter 7 Pros
Major Financial Help
The biggest advantage of Chapter 7 bankruptcy is the elimination of all unsecured debts, such as utility, medical, and credit card bills, and personal loans. The best part is that debt relief is unlimited, meaning bankruptcy can discharge hundreds of thousands of dollars owed.
Automatic stay
During a Chapter 7 bankruptcy, a lender cannot repossess or foreclose on your property. This is a temporary solution that allows you to catch up on payments or find an alternative.
Debt Collector Protection
The automatic stay guards you against creditors who may have previously harassed you for debt collection. If you fully discharge a debt, you gain permanent protection. On the contrary, you may get a partial discharge and a time extension.
Garnishment of Wages
No creditor can garnish your wages or monthly income once you declare bankruptcy. This money can be used to meet basic needs and regular expenses.
Exemptions
Chapter 7 allows you to keep assets like a family home, a car used for the daily commute, clothes, furniture, etc. You can also control valuables worth less than a certain amount (usually $10,000 or less), allowing you to live comfortably.
Clean Slate in Months
Bankruptcy under Chapter 7 can fix financial issues in 3-6 months. You get quick debt relief and a fresh start. In contrast, Chapter 13 bankruptcy entails a 5-year debt repayment plan.
Cons of Chapter 7
Limited qualifications
Chapter 7 is not available to individuals or businesses that earn over a certain amount. Your bankruptcy will be modified to Chapter 13, which entails partial or no debt forgiveness.
Bad Credit
Your credit score will fall regardless of the bankruptcy type. Credit reports show bankruptcy for 7-10 years. If you qualify, you will be unable to receive new credit or loans for a long time. If your credit score is already poor, bankruptcy won’t help much. It will assist you to boost your results.
Asset Liquidation
Non-exempt assets will be liquidated to pay creditors, including luxury automobiles, real estate, and collectibles.
Unwanted Media
When you declare bankruptcy, your financial situation is made public. Anyone can search up the default, but few do.
Debts not dischargeable
Mortgages, school loans, and vehicle loans are not dischargeable under Chapter 7. Also, bankruptcy does not relieve financial responsibilities like child support, alimony, and taxes.
Pros of Chapter 13
If you have a steady income, you may want to consider this option. Among the key reasons to evaluate Chapter 13 are:
Debt recovery over three to five years
Chapter 13 allows you to pay back your debts over a three to five-year period.
Minimal influence on credit score
Chapter 13 filings stay on your credit report for seven years versus ten years for Chapter 7 filings.
Mortgage catch-up
Filing for Chapter 13 stops foreclosure and allows you to catch up on payments.
Cons of Chapter 13
Aside from the fact that your credit score will be less damaged, there are a few reasons why Chapter 13 may not be the best option for you.
Chapter 13 is more
Chapter 13 may not be the best option if you need to pay off your obligations quickly. However, Chapter 7 bankruptcy only takes months.
Wage demands may bar you
Regular wages are required to qualify for Chapter 13 bankruptcy. This filing may not be suitable for those who obtain earnings sporadically.
Find out: Why Filing for Bankruptcy is Not Scary
Know what debts are dischargeable in Chapter 7
Under bankruptcy Chapter 7, most unsecured debts are discharged. Unsecured debt is debt without collateral. For example, the obligation is unsecured if you didn’t consent to the creditor taking the property acquired on credit.
If you have a mortgage or vehicle payment, you presumably agreed that if you default, the creditor might seize your property, sell it, and use the revenues to pay the debt. This is a secured debt. Collateral secures debt payment.
Paying back rent is one of the most common unsecured consumer obligations. Unsecured debts are dischargeable under Chapter 7.
Secured Debts and Chapter 7
Can secured debts be dischargeable? Yes. Any. But the connected lien remains. So long as the obligation is outstanding, the creditor has the right to collect the property. For example, you may cancel a mortgage or auto loan, but you must give up the property.
If you don’t want or need the secured property, let the creditor have it. When filing for bankruptcy, indicate you intend to forfeit the property. However, you must assist the creditor in regaining custody of the property. Sometimes creditors won’t repossess tiny objects since picking them up costs money.
The property may be yours if the creditor does not acquire a security interest in it. For example, if a car dealer neglected to put a lien on your automobile and the value of your car is exempt. The dealer’s claim would be unsecured, and the automobile would be excluded.
It’s unusual, and you’d need to be able to secure the complete car’s worth with a bankruptcy exemption. If not, the Chapter 7 trustee will sell the car, refund your security interest, and use the proceeds to pay creditors.
Know what debts are dischargeable in Chapter 13
Crowded or Removed Secured Debts
Generally, a bankruptcy discharge does not remove liens. A mortgage or auto loan gives your lender a security stake in your home. Unpaid debts may lead to foreclosure or repossession, even if you have been discharged.
Most Unsecured Debts
Unlike priority debts, most nonpriority unsecured debts are not given preferential consideration in bankruptcy. Most nonpriority unsecured debts are dischargeable in Chapter 13 bankruptcy unless the creditor can prove fraud or false premises.
Typical unsecured debts that can be discharged in Chapter 13 bankruptcy include:
- credit card debt
- medical bills
- personal loans
- old nonpriority income tax liabilities
- bills, and most court judgments
Remember that you will probably pay some of these debts through your Chapter 13 plan. Finally, the court discharges any remaining balances.
Listed below are some typical debts that may be discharged in Chapter 13 but not in Chapter 7:
- liens arising from intentional property damage
- unpayable tax debts
- debts incurred as part of a property settlement agreement in a divorce or separation
- alimony or child support obligations are not dischargeable
- past bankruptcy debts that were not discharged
- pension loans
- outstanding homeowners organization or apartment costs after your filing date, including government fines and penalties (excluding criminal penalties).
In the end, the benefits and drawbacks of both Chapter 7 and Chapter 13 bankruptcy need to be considered carefully. Neither option is guaranteed to work for everyone, and some people will choose to try one and then the other later down the road if their situation doesn’t improve and they still can’t pay off their debts.
Whatever option you end up choosing, you must take the time to look for a Dallas bankruptcy attorney to help you file under Chapter 7 or Chapter 13. Dealing with how to choose between the two can be stressful and confusing.
You might feel at a loss when you’re trying to decide whether Chapter 7 bankruptcy is better than Chapter 13. It’s natural to feel this way; we’ve all been through that same conflict of deciding whether it’s suitable for us and which path we should take. Talk to us now at the Law Office of Jeffrey B. Kelly; we would be happy to help you!