Choosing Between Chapter 7 and 13
Are you considering bankruptcy? Whether it’s Chapter 7 or 13, you have options. Bankruptcy is a challenging, life-altering experience.
If you are considering consulting with an attorney about your debt-relief options, it is essential to remember that each type of bankruptcy comes with its advantages and disadvantages.
Most people filing for either Chapter 7 or 13 bankruptcy will work directly with an attorney to determine the best option for each financial circumstance.
Chapters 7 and 13 of the Bankruptcy Code – Awareness
Consider your income, assets, creditors, expenditures, and your ability to pass the means test while selecting between Chapter 13 and Chapter 7. You should get legal assistance from a knowledgeable bankruptcy attorney in Denver.
The United States Bankruptcy Code governs both chapter 7 and chapter 13 bankruptcy. However, there are significant distinctions.
Chapter 7 (Liquidation)
Chapter 7 bankruptcy petitioners get a discharge from the bankruptcy court within three to four months. Creditors are prohibited from contacting you after your petition is filed.
While bankruptcy law forces you to sell some assets to repay unsecured creditors, the majority of Americans keep all of their property because of bankruptcy limits on the categories of assets that may be used to settle debts.
Bankruptcy Chapter 7 allows for limitless credit; but, significant gains are not permitted. Such is one of the primary distinctions between Chapter 7 and Chapter 13 bankruptcy.
Chapter 13 (Reorganization)
A repayment plan under Chapter 13 is necessary. While creditors may oppose the Chapter 13 plan’s distribution, they are obligated if the bankruptcy court approves it.
Your budget determines your monthly payment. Unlike Chapter 7, Chapter 13 bankruptcy enables you to decrease the interest rate on your vehicle loan and, in certain situations, the total amount owed.
Advantages of Chapter 7 Bankruptcy
- Chapter 7 bankruptcy is the most often filed type of bankruptcy.
- It’s a relatively straightforward technique to eliminate the majority of your debt.
- Without having to repay it later, you may immediately begin rebuilding your credit.
- Chapter 7 bankruptcy is appropriate for unsecured debtors.
If you have a large amount of credit card debt or high medical costs that you can’t pay, Chapter 7 may allow you to start again.
Disadvantages of Chapter 7 Bankruptcy
- Chapter 7 is a disaster when it comes to secured debt.
- Chapter 7 will not assist you if your primary source of debt is a mortgage, auto loan, or other kinds of debt. Additionally, not all unsecured debt is dischargeable under Chapter 7.
- Chapter 7 has a means test.
The means test decides who can seek debt relief. A single family’s income must be less than the state median or leave insufficient funds to pay basic expenses.
- Short foreclosure protection – When your home is faced with foreclosure, the automatic stay is not in effect indefinitely.
- Co-signing a loan carries a risk – Anyone who co-signs a loan may be obligated to repay the debt on your behalf.
- Limitation on filing – For eight years after the conclusion of your initial case, you are prohibited from filing another Chapter 7 petition.
Advantages of Chapter 13 Bankruptcy
- Maintain ownership of all property – As long as you comply with the terms of your repayment plan.
- While debt is not eliminated, it is significantly reduced.
- Complete protection from creditors – This includes wage garnishment and debt collection.
- Classification of obligations – Define the difference between debts incurred with a third party and those incurred with oneself.
- Dischargeable debts: Debt acquired due to fraud or purchases of luxury items purchased using a credit card.
- Protection for co-signers: If the payment plan is for the total amount of the obligation, your co-signers are protected from creditors.
- Unimaginable Future Chapter 13 petitions: At any point, you may file a Chapter 13 petition later.
- The lender protects the borrower against foreclosure.
- Increased time to repay non-dischargeable debts.
Disadvantages of Chapter 13 Bankruptcy
- All of your additional cash is locked up for the duration of the repayment plan.
- Expenses for legal counsel increases due to the more complicated bankruptcy procedure.
- Debt repayment takes three to five years.
- Brokers of stocks and commodities are entirely prohibited from filing for bankruptcy.
Determine whether debts are dischargeable under Chapter 7.
Chapter 7 Bankruptcy Clears Most Unsecured Debt
Unsecured debt is debt without collateral. For instance, if you did not agree to the creditor seizing the property obtained on credit, the debt is unsecured.
If you owe a mortgage or car payment, you likely agreed that if you fail, the creditor may take your property, sell it, and use the proceeds to repay the obligation. This is a secured obligation. Collateral guarantees debt repayment.
Rental payments are one of the most typical unsecured consumer debts. Chapter 7 allows for the discharge of unsecured debts.
Chapter 7 Debts and Secured Debts
Is it possible to discharge secured debts? Yes. However, the associated lien remains. The creditor has the right to recover the property as long as the debt is unpaid. For instance, you may terminate a mortgage or vehicle loan but surrender the property.
If you no longer need the secured property, let the creditor have it. Indicate your intention to relinquish the property while filing for bankruptcy. You must, however, help the creditor in reclaiming possession of the property. Occasionally, creditors may refuse to repossess little goods due to the expense of picking them up.
If the creditor does not establish a security interest in the property, it may be yours.
This is possible if a car dealer fails to place a lien on your vehicle and the vehicle’s worth is exempt. The dealer’s claim would be unsecured, and the car would be excluded from the lawsuit.
This is just an exemption and you would need to obtain the total value of the vehicle via a bankruptcy exemption. If not, the Chapter 7 trustee will sell the car, repay your security interest, and distribute the money to creditors.
Recognize the types of debts that are dischargeable under Chapter 13.
Secured Debts Consolidated or Eliminated
In most cases, a bankruptcy discharge does not eliminate liens. A mortgage or car loan secures the lender’s interest in your house. Even if you have been discharged, unpaid debts may result in foreclosure or repossession.
The Majority of Unsecured Debts
In contrast to priority obligations, most nonpriority unsecured debts are not examined throughout the bankruptcy process. Unless the creditor establishes fraud or false premises, most nonpriority unsecured obligations are dischargeable in Chapter 13 bankruptcy.
Unsecured obligations that are often dischargeable in Chapter 13 bankruptcy include the following
- medical debt
- credit card debt
- personal loans,
- personal loans, delinquent income tax obligations,
- and the majority of court judgments
Remember that you will most likely repay some of these obligations as part of your Chapter 13 plan. Finally, any excess amounts are discharged by the court.
Which Bankruptcy Chapter Do You Need: Chapter 7 or 13?
There are essentially two main chapters you need to be concerned with when it comes to bankruptcy. They are chapter 7 and chapter 13. Both of these options can help get you out of your debt. However, their differences are what set them apart from each other. It’s also vital to realize that different factors go into this decision.
Working with an attorney, you will be able to determine which is the best option for you. Only your bankruptcy attorney can provide you with sound legal advice. Please feel free to contact The Law Office of Clark Daniel Dray today for more information.