Chapter 13 Vs Chapter 7 Bankruptcy: Differences
In some cases, a Chapter 13 bankruptcy (often referred to as a “wage earner reorganization”) presents a better solution than a Chapter 7 (“liquidation”) for financial crises. In a Chapter 13 bankruptcy, you propose a plan to repay all or only a portion of your unsecured debts over the next three to five years, as well as catch up on any past due secured debt (mortgage payments or car payments for example) in order to stop a foreclosure or repossession of your property. Although it can take up to five years to get out from under your debt completely. Creditors will have to accept your repayment terms. Long term, it might be a smarter legal move than a Chapter 7 or paying back debts on your own.
It Might Be Easier To Qualify
In 2005, Congress amended the Bankruptcy Code and, among other changes, added a “means test” to the bankruptcy laws. Consequently, to qualify for a Chapter 7 bankruptcy now, you cannot be making so high of an income, or have enough “disposable” income at the end of the month so that, according to a calculated formula, you might feasibly be used to pay off at least a portion of your debts. The truth is individuals who file for bankruptcy aren’t always unemployed or completely broke. Chapter 13 bankruptcy is often times the right solution for the people who are ineligible to file for the often times quicker, easier Chapter 7 or those who need to take advantage of the plan repayment options for delinquent secured debt available in Chapter 13. Upon filing your Chapter 13 bankruptcy petition and plan, a trustee will be assigned to carefully examine your financial situation and see if your proposed repayment plan meets the requirements for confirmation. Once confirmed, your creditors must accept the payments dictated in the plan, even if ultimately, they are paid significantly less than the amount of the original debt before bankruptcy. Before you decide to file, it is a smart idea to consult a knowledgeable professional who can go over your financial situation and properly advise you on whether you qualify for a Chapter 13 and if it is in your best financial interest to file.
It Protects Nonexempt Property.
If you file for bankruptcy, you are obligated to list all of your debts, as well as all of your assets. Under a Chapter 7, some of your assets may fall outside of the allowed federal or state exemptions for property you can keep and may be categorized as “nonexempt.” Your nonexempt assets can be sold by the Chapter 7 Trustee to repay creditors in order to satisfy your debts. For example, you may have cash in excess of the allowed Chapter 7 exemptions, excess equity in real property or you may even own valuable personal property. In a Chapter 7, this property could be taken from you. By contrast, in a Chapter 13, the Trustee is not looking for nonexempt property to sell, but rather, he is looking to make sure you propose a feasible repayment plan that takes care of your creditors to the best of your ability based on guidelines set up in the Bankruptcy Code. As long as your Chapter 13 plan is confirmed by the court and you maintain your required monthly plan payments, you can retain the stuff you want to keep, repay past due secured debt (mortgage payments, car payments) and “priority” unsecured debt (certain state and federal taxes) over time and even save your house from foreclosure.
You May Feel It’s The “Right Thing To Do”
Let’s be honest: with a Chapter 13 you will normally pay off more of your debt (using future income) as opposed to the Bankruptcy Court forcing your unsecured creditors to write off your debt completely in a Chapter 7. While both Chapter 7 and Chapter 13 will probably result in your ultimately being discharged from your unsecured debts, choosing the Chapter 13 route will indicate your willingness to take responsibility for your debts to the best of your financial ability while ethically using the resources available to you restructure your affairs.
Because declaring bankruptcy can be a very painful, emotional process, it is best to do as much research as possible before making the decision, and it’s always advisable to speak to a knowledgeable professional who can go over your personal financial situation and properly advise you as to whether or not bankruptcy is the right path for you to take.