Still, there are instances when the hole is already too deep, and the only way out is bankruptcy.
Filing for bankruptcy provides relief from debts. Majority of bankruptcy cases are filed under two common bankruptcy programs – Chapter 7 and Chapter 13. If you’re thinking about declaring bankruptcy, you need to familiarize yourself with how they both work, as the plan you choose will have a profound impact on your case.
What is Chapter 7 Bankruptcy?
Chapter 7 is a form of liquidation bankruptcy that erases most of the applicant’s unsecured debts such as medical bills and credit card payments.
When you file for chapter 7, the bankruptcy court reviews your bankruptcy papers and other supporting documents. A trustee will then sell your nonexempt assets and divide the money among your creditors.
Any unpaid debts will be discharged. If you don’t have any nonexempt properties, the creditors get nothing.
Filing for chapter 7 comes with an order called the “automatic stay,” which prevents most of your creditors from pursuing any collection efforts. Furthermore, when a debt is discharged, it means you no longer owe it by legal standards.
Only unsecured debts, however, are dischargeable. Should you have secured debts like a mortgage or a car loan, you can either relinquish it or choose to keep it and continue payments as agreed.
The law has set an income threshold for those who wish to qualify for chapter 7 bankruptcy. If you earn more than the designated state limit, you’ll have to file under chapter 13. More than 95% of those who filed for chapter 7 received a discharge – most of these cases involve debtors whose assets fall below the legal threshold, and therefore, had to give up nothing.
Chapter 7 bankruptcy is often favorable for debtors with low incomes and little-to-no assets. It may also work for people whose dischargeable debts exceed the amount of their nonexempt properties
What is Chapter 13 Bankruptcy?
Unlike chapter 7 that liquidates your assets to settle your debts and discharges the rest, chapter 13 is a reorganization bankruptcy. It is for debtors whose regular incomes can still cover a portion of their obligations through a repayment plan.
Should you choose to file for chapter 13 bankruptcy, all your debt obligations are combined, and you’ll have to pay for it in monthly repayments. Chapter 13 often involves both secured and unsecured debts.
In chapter 13, you get to keep all your assets (exempt and nonexempt), but you have to pay a portion or the entirety of your debts through a repayment plan.
The amount for repayment is equal to the total value of your nonexempt assets. Chapter 13 debt obligations are usually repaid in three to five-year plans.
Chapter 13 bankruptcy is typically a good option for those whose incomes disqualify them from chapter 7 but still require debt relief.
It also gives a chance for people who missed on their car or mortgage obligations to catch up on payments and keep the properties as well.
Chapter 7 vs. Chapter 13: Which One Should You File?
One benefit that makes filing for chapter 7 very appealing is the near-guaranteed debt relief — but this only applies to unsecured debts. Chapter 13, on the other hand, is better when you’re dealing with secured debts. Debtors who have fallen behind their mortgage payments and are in danger of losing their homes can file for chapter 13 to avoid foreclosure.
Those who have filed for bankruptcy and successfully discharged their debts in the past may find out that only chapter 13 is available to them, since chapter 7 has more stringent rules for refiling. If you have received a chapter 7 discharge a few years back, you may not qualify for another one in 8 years. You may, however, file for chapter 13 after only four years.
As to how chapter 7 and chapter 13 can affect your credit score, it’s more or less the same. You will experience a considerable decrease in your credit score, but it should get better over time. A chapter 7 bankruptcy, however, will reflect on your credit report for ten years, while a chapter 13 stays there for only seven.
other valuable tips:
Is Bankruptcy Right For You?
Whether filing for bankruptcy can help you out of a downward spiral depends on the nature of your debts and the factors affecting your unique financial situation.
The best way to determine which type of bankruptcy is right for you, or if you should even file for one, is by consulting a bankruptcy attorney. Bankruptcy law is quite complicated; you’ll need someone who’s experienced in dealing with the ins and outs to oversee your case.
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