Bankruptcy: The Differences Between Chapter 7 and Chapter 13
Article provided by B. Phillips & Associates, P.C., please visit us at http://www.phillipslawassociates.com
Bankruptcy: A Sound Choice in Difficult Times
As people find themselves behind on their mortgage payments, credit card bills, car loans and other bills, many wonder whether bankruptcy is a viable option to help get a handle on financial matters. Depending on the financial situation of the individual, bankruptcy may be a healthy, responsible way to reduce debt and repair damaged credit.
In 2005, there were important changes passed to US bankruptcy laws. There is a misconception, however, that these changes have made it nearly impossible for most Americans to successfully file for bankruptcy. This is not true. In fact, most the people who qualified for bankruptcy prior to 2005 still will qualify for bankruptcy protection now.
Another popular misconception about bankruptcy is that it hurts credit scores. While an individual's credit score may go down in the short-term after filing for bankruptcy, in the long-term, bankruptcy can help improve the individual's credit as the bad debts are removed from their records. There also are special loans and credit lines available to those who have filed for bankruptcy to help them reestablish credit and rebuild their score.
There are two main types of bankruptcy filed by those with consumer debt: Chapter 7 and Chapter 13. The best type for any individual will depend on that person's current financial situation, their goals for filing bankruptcy and the types of assets they have. Some people will qualify for both Chapter 7 and Chapter 13 and will be able to choose one type of filing over the other. Others, however, will only qualify for one type of filing and will need to decide if bankruptcy is their best financial option.
Chapter 7
Chapter 7 bankruptcies are the most common type of consumer bankruptcies. In a Chapter 7 filing, consumers, or "debtors," may be able to completely eliminate most or all of their debt, including credit card debt.
Chapter 7 bankruptcies also are referred to as "liquidation" bankruptcies. Once a debtor files a petition for a Chapter 7 bankruptcy, the bankruptcy court will issue an automatic stay, which prevents creditors from using any means to collect their unpaid debts. The bankruptcy court will also appoint a trustee to determine whether the debtor has any property that may be sold to satisfy some or all of the debt. The trustee only can liquidate certain types of property that are non-exempt under the Bankruptcy Code, like second homes, additional vehicles and family heirlooms.
Many people wrongly believe they will lose all of their property by filing for a Chapter 7 bankruptcy. This simply isn't true. Most debtors who file for bankruptcy will not lose any of their assets because they only own exempt property. Some examples of exempt property include the family home, the family car, pensions, reasonably necessary clothing, household items and furnishings.
Once the trustee has paid off creditors from the liquidated assets (if there were any), all other debt owed by the debtor is discharged, meaning the debt is wiped off of the debtor's record and the debtor is no longer responsible for paying it.
Chapter 7 is a good option for those who are behind on their bills and do not have the means to pull themselves out of debt. Chapter 7 will provide these debtors with a fresh start and give them a chance to rebuild their credit.
However, it is important to note that not all types of debt may be discharged in bankruptcy, whether it's a Chapter 7 or 13 filing. These include: student loans, alimony, child support, damages from a personal injury lawsuit and back income taxes. Debtors will be responsible for paying these debts until they are satisfied, even if they successfully have filed for bankruptcy.
Chapter 13
Unlike Chapter 7 bankruptcies that allow you to eliminate your debt, Chapter 13 bankruptcies allow you to restructure your debt and create a plan to repay your creditors. Like Chapter 7, once a debtor files a petition for Chapter 13 with the bankruptcy court, an automatic stay is issued and creditors must cease any and all debt collection activities.
The debtor will create his or her own repayment plan and submit it to the court. The creditors have a right to contest the plan and request different repayment terms. However, once the bankruptcy court approves a debtor's repayment plan, the creditors cannot try to get additional money from the debtor or otherwise change the terms of the plan.
Most repayment plans are 3-5 years long. The debtor will have to prove to the court that he or she has enough available income and will continue to have sufficient income to stick to the terms of the plan and repay the debt. Once the debtor completes the plan, any remaining debts will be discharged.
Perhaps one of the biggest advantages of a Chapter 13 bankruptcy is that homeowners may be able to keep their homes out of foreclosure. Once the homeowner files the petition with the bankruptcy court, the lender will not be able to foreclose on the home. The homeowner can then include past due mortgage payments in his or her repayment plan. This will give the homeowner a 3-5 year period to catch up on missed payments, potentially making the payments lower and easier to afford. However, if the home already is in foreclosure, a Chapter 13 cannot save it. Also, if the homeowner fails to make the payments under the repayment plan, the lender can begin foreclosure proceedings.
Chapter 13 bankruptcies are a good option for individuals who want to repay some or all of their debt, as well as those who want to keep their homes out of foreclosure and have the resources to do so. It also is a good alternative for those who have assets they would otherwise lose in a Chapter 7 filing.
A Note of Caution on Debt Cancellation Programs
As the economy declines and more families find themselves in dire straits, the number of consumer debt cancellation companies has risen. In some of their advertisements, these companies allege that their programs will allow consumers to pay back their debt for pennies on the dollar in very short periods of time.
If it sounds too good to be true, then it most likely is. There is no magic way to make your debt disappear and anyone who promises otherwise is most likely running a scam. Consumers should be wary of these types of programs. After using debt cancellation services, many consumers do not find themselves debt-free, but in more trouble financially than they were before contacting the debt cancellation program.
Conclusion
There is no shame in filing for bankruptcy. Whether you have lost your job, had unexpected medical bills or just found yourself falling further and further behind each month, bankruptcy is a good, responsible way for consumers to get out of debt and finally get ahead of their bills and move on with their lives.
Article provided by B. Phillips & Associates, P.C., please visit us at http://www.phillipslawassociates.com
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