Chapter 7 vs. Chapter 13

There are major differences between Chapter 7 and Chapter 13 bankruptcy.

Chapter 7 Bankruptcy

During a Chapter 7 bankruptcy, sometimes referred to as “straight bankruptcy liquidation” the debtor must pass the “means test” to determine eligibility. Those with incomes higher than their state’s median income are normally not allowed to file under this chapter of the Bankruptcy Code. In addition, you cannot file Chapter 7 bankruptcy if you have been discharged in an earlier Chapter 7 filed within the last eight years.

In order to qualify for filing a Chapter 7 bankruptcy, the filer must also undergo an approved credit counseling course within 180 days before filing a bankruptcy petition with the court. A trustee will be appointed to oversee all records and activities of the proceedings. All of the debtor’s non-exempt assets are surrendered and sold and all monies received from this liquidation are distributed among the creditors according to priority established by the Bankruptcy Code. The debtor is entitled to retain ownership of exempt items, such as clothing, electronics, household goods and sometimes a vehicle or even the family home.

In a Chapter 7 bankruptcy, most pre-petition debts are discharged (eliminated) upon the conclusion of the bankruptcy. Debts that are not dischargeable include student loans, taxes and child/spousal support obligations. The debtor must maintain mortgage payments to preserve the family home, under the Homestead exemption, if there is not substantial non-exempt equity. Marital ownership law may also preserve one’s home. A new law provides a maximum Homestead exemption of $125,000 if the home was acquired 40 months before the Chapter 7 bankruptcy filing.

A filer’s vehicle may be taken by creditors unless it is needed for work or if arrangements have been made to pay off the loan by ‘redemption’ or ‘reaffirmation’. If you own your vehicle and are not making payments you will be allowed to keep it if its value falls beneath the vehicle exemption amount for your state. If you are making payments on your car, you will need to decide whether you want to surrender the vehicle or keep it by continuing to make payments. You will inform the court of your intention by filing the Statement of Intention (SOI), as well as mailing a copy of the SOI to your vehicle lender. This holds true if you are leasing a car, as well.

When you file for Chapter 7 bankruptcy, you will be protected from creditor harassment since creditors and their representatives are forbidden by federal law to harass you, your family, friends and employer once the bankruptcy proceedings have begun. The Fair Debt Collection Practices Act (FDCPA) establishes guidelines under which debt collectors may perform their business, defines consumer rights pertaining to debt collection and sets down penalties and remedies for violations. It is often used in combination with the Fair Credit Reporting Act.

The ability to reestablish your credit after filing Chapter 7 bankruptcy is often easier than before filing. Although filing for a Chapter 7 bankruptcy can remain on your credit report for up to 10 years, you can start reestablishing your credit immediately. Although you may have to pay slightly higher interest rates, you should qualify to purchase a home or car and qualify for credit cards soon after your Chapter 7 bankruptcy has been discharged. You may even see a flood of credit card offers in your mailbox soon after your bankruptcy is discharged. Just be wary of the card/s you sign up for, check the interest rates and fees very carefully as interest rates can soar to 24% or higher. Take the time to carefully compare and contrast interest rates, late fees, monthly fees and cancellation fees. You will also need to ensure that the issuing bank reports your credit history to the credit bureaus since you want them to record your timely payments and good credit standing. This is how you improve your credit score.

At the conclusion of the Chapter 7 bankruptcy, the court will enter a discharge order, effectively ending the enforceability of dischargeable pre-petition debts.

Chapter 13 Bankruptcy

During a Chapter 13 bankruptcy, often called “reorganization”, the filer must undergo an approved credit counseling course within 180 days before filing a bankruptcy petition with the court, as with Chapter 7 bankruptcy. The bankruptcy petition, along with a three-to-five-year debt–management plan, is filed with the court. These payments are made from disposable income; that is, funds that are left after necessities such as food, clothing and shelter, have been allowed for.

Chapter 13 bankruptcy is for those filers who have less than $383,175 in unsecured debt and $1,149,525 in secured debt. Chapter 13 discharge is not allowed if the debtor had received a discharge in Chapter 7, 11 or 12 within four years or a previous Chapter 13 discharge within two years.

With the exception of student loans, taxes and child/spousal support obligations, debts are discharged when the filer’s debt-management plan is successfully completed and the court enters a discharge order.  The debtor’s home will be saved if the debt-management plan is successfully completed and if there is not substantial non-exempt equity. As in Chapter 7, the home may be preserved under the Homestead exemption of $125,000 if the home was acquired 40 months before the Chapter 13 bankruptcy filing or marital ownership law.

In addition, the filer’s vehicle will be preserved if the debt-management plan is successfully completed and appropriate payments made. Otherwise, it could be taken by creditors (unless arrangements are made to pay off the lien).

A Chapter 13 bankruptcy may remain on your credit report for up to ten years from the date of filing, although some creditors will report a Chapter 13 bankruptcy for only seven years. Creditors may prefer to see this form of bankruptcy, since successful completion of debt repayment plan may pay more debts than would be paid under a Chapter 7 bankruptcy filing.

After speaking with an experienced bankruptcy rep from Client First Bankruptcy, you will soon discover that filing for your personal or business Chapter 13 or Chapter 7 bankruptcy can open new doors to a more secure financial future. Call us right now at 800-383-6004 for a plan to start a more secure financial future.