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WHICH CHAPTER IS BEST FOR YOU?
Once you’ve decided that bankruptcy is the right solution for your financial situation, you will need to decide which type of bankruptcy is most beneficial. Choosing the right bankruptcy option for your current debt situation and your future financial goals is difficult. By arming yourself with knowledge on the differences between Chapter 7 and Chapter 13 bankruptcies, as well as guidance from an experienced bankruptcy attorney, you will be able to make an informed and confident decision.
This article is intended to give a brief overview of the options in bankruptcy. It doesn’t cover all the issues you might encounter or discuss any particular issue in depth. Before proceeding with bankruptcy, the best practice is to review your particular case with a knowledgeable Georgia bankruptcy attorney.
Chapter 7 vs. Chapter 13 Bankruptcy
- Bankruptcy Type: Chapter 7 bankruptcy is often referred to as a ”straight bankruptcy” or “liquidation bankruptcy”. Chapter 13 bankruptcy is often referred to as “reorganization bankruptcy”.
- Bankruptcy Eligibility: Chapter 7 bankruptcy may be filed by indebted individuals or businesses. Chapter 13 bankruptcy is a debt relief option available only to indebted individuals. A business cannot file Chapter 13.
- Trustee Responsibilities: Within a Chapter 7 bankruptcy, a trustee determines and facilitates the selling of assets before providing creditors with the proceeds to pay down debts. A Chapter 13 bankruptcy trustee assists in the creation and proposal of a court-approved monthly debt repayment plan.
- Property Protection: Individuals filing Chapter 7 bankruptcy are permitted to protect certain property from liquidation by way of state-level exemption laws. For Chapter 13 bankruptcy, all assets are generally kept as long as the court-approved debt repayment plan meets the liquidation requirement.
- Bankruptcy Length:The typical length of the Chapter 7 bankruptcy process, considered a more immediate debt relief option, is 4-5 months. The Chapter 13 bankruptcy process, considered to be more of a debtor rehabilitation program, generally takes between three and five years to complete.
- Bankruptcy Frequency: Chapter 7 bankruptcy is the nation’s most common form of bankruptcy.
- Bankruptcy Complexity: Chapter 7 bankruptcy has gotten significantly more complicated since the enactment of the BAPCPA Bankruptcy Act (2005). Additionally, the Chapter 13 bankruptcy process is generally considered to be more complicated than that of Chapter 7 bankruptcy.
- Bankruptcy Success: Statistically speaking, filing for bankruptcy without the assistance of a bankruptcy lawyer severely increases the chances that a Chapter 7 or Chapter 13 bankruptcy case will be dismissed within the first couple months of the respective bankruptcy processes.
Your income and assets will determine the bankruptcy chapter you file. In Chapter 7 the trustee has the power to sell your nonexempt property to pay back your creditors. If that is the case, a Chapter 7 might be costly if you own a lot of assets. On the other hand, Chapter 13 bankruptcy allows you to keep all of your property in exchange for paying back a portion or all of your debts through your repayment plan. You get a 100% guarantee that you keep control of your assets.
Chapter 13 bankruptcy offers debtors additional benefits that aren’t available in Chapter 7 such as the ability to:
- Save a home subject to foreclosure
- Get a car back from the creditor if it has been repossessed or stop repossession
- Reduce the principal balance of your car loan or investment property mortgage
- Eliminate your second mortgage or another unsecured junior lien through lien stripping.
- Discharge property settlements from divorces
- A Chapter 7 bankruptcy will discharge most types of unsecured debt. The trustee will try to sell any significant nonexempt property in order to repay your creditors.
- Time Frame: A typical Chapter 7 bankruptcy case takes four to five months to complete.
- Property: Most people who file for Chapter 7 keep all or most of their property. Petitioners with significant equity or assets that are not exempt by law could lose them to satisfy some debts.
- Your Income: If you make too much money you will not qualify for Chapter 7 and will have to look at filng for Chapter 13 to repay some or all of your debt.
- Homeowners/Foreclosures: Chapter 7 can temporarily stop foreclosure, but unless you can get current on your mortgage, the foreclosure will eventually continue.
- Car Repossession: Chapter 7 can stop a car repossession temporarily but if you cannot get current on your car shortly after filing you will have to surrender the car. If you current on your car and maintain your payments you can retain your car.
- Eligibility: Chapter 7 is available to those whose income is less than the median of their state, or those who can pass the means test.
- In Chapter 13 bankruptcy you repay your creditors through a Chapter 13 repayment plan.
- Time Frame: The Chapter 13 payment plan lasts three or five years.
- Property: No property is liquidated under a Chapter 13 bankruptcy.
- Your Income: Chapter 13 requires a regular income for the monthly payment. if you cannot afford your payment then your case will dismiss.
- Homeowners/Foreclosures: Chapter 13 can stop a foreclosure and you can make up past due mortgage payments through your repayment plan.
- Car Repossession: Chapter 13 can stop a car repossession and you can restructure your loan through your repayment plan.
- Eligibility: Chapter 13 has no income requirement, but unsecured debt must be below $419,275 and secured debt below $1,257,850
WHEN TO FILE CHAPTER 7
1. If you have very little income or assets.
Declaring Chapter 7 bankruptcy allows the court to take some of your valuable possessions, property, or savings (known collectively as assets) and sell them to pay your creditors. That said, most people who qualify to file for Chapter 7 don’t really have much in the way of assets, and thereby have little if anything to pay their creditors with. As a result, their debts are forgiven without any attempt at repayment.
Moreover, because their income is so low, there is not enough money to feasibly construct a debt payment plan, which means they cannot be pushed into a Chapter 13 bankruptcy. Statistics show that the majority of people who declare Chapter 7 bankruptcy don’t have any significant income and 85% have no assets that can be sold by the court.
2. If your debts are too high to pay down.
If you have an extremely large amount of debt (perhaps due to high medical bills), you may have already exhausted your resources trying to pay it down and probably do not have enough income to construct a Chapter 13 payment plan. In this case, Chapter 7 may be the only way for you to get out from under an enormous amount of debt and move on with your life.
WHEN TO FILE CHAPTER 13
1. If you have assets you want to protect.
In Chapter 13 bankruptcy, the court won’t sell any of your assets because you’ll use current income to pay off your debts. So if you own a home that you would like to keep or if you have other items you don’t want sold, Chapter 13 is probably a better choice. However, you do need a good income that is reasonably stable in order to construct a debt payment plan. The money left over after deducting your living expenses and secured debt payments is then used to pay off your other creditors.
But one requirement for Chapter 13 is that your payment plan pays off at least as much debt as if your assets had been sold. For example, if you have a valuable collection of art, you probably won’t be able to declare Chapter 13 bankruptcy and keep it. This is because under Chapter 7, your collection would be sold and your creditors repaid.
2. If you have a regular income and have been making debt payments.
Chapter 13 bankruptcy allows you to construct a payment plan where your debts are paid down in line with what you can afford according to your income. Plus, you won’t have to worry about interest rates going up or being hit with extra penalties or fees. At the end of the payment plan, you will have paid as much as you can over a three or five-year payment period, and the remainder of your debts will be forgiven – ideally without you having to sacrifice any assets.
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