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Chapter 7 vs Chapter 13 Bankruptcy

in Rants

As a Christian, it may be tough to face the idea that bankruptcy may be the only way to get out of a dire financial situation. We’re taught from an early age to be good stewards of the wealth that God has given us. When we come to the realization that, somewhere along the way, we may not have done this well, it can be difficult. But, if you are at this point, it’s important to recognize that declaring bankruptcy and restarting with a clean slate may be the best way to reorganize your financial situation and become even better stewards of your wealth. 

If you are ready to take on the process of declaring bankruptcy but need a little bit more information before getting started, keep reading. We are going to look at the differences between Chapter 7 and Chapter 13 bankruptcies and which may be best for your situation. 

Chapter 7 and Chapter 13 Bankruptcy Overview 

I’ve come across multiple individuals that are not happy with filing a Chapter 13 bankruptcy, and, oftentimes, this is due to a lack of proper explanation of the differences that exist between these two bankruptcy types. From what we observe, most bankruptcy applicants have not realized these three things: 

  1. Most attorneys have payment plans for Chapter 7 bankruptcy 
  2. It’s much more expensive to file for Chapter 13 bankruptcy than other bankruptcy types 
  3. It’s possible to keep your assets in a Chapter 7 bankruptcy discharge 

Let’s help you to understand these two bankruptcy types in detail: 

What is Chapter 7 Bankruptcy

 This type of bankruptcy is commonly called liquidation bankruptcy. In this bankruptcy type, a bankruptcy trustee liquidates (or sells) assets nonexempt assets. There are instances of Chapter 7 bankruptcies without liquidations, however. Despite this, there’s still a possibility of loss if you don’t properly review the limitations of the bankruptcy exemptions prior to filing for a bankruptcy discharge. 

Those who can file for a Chapter 7 bankruptcy are mostly businesses, individuals that have incurred business debts, and those that meet its income requirements. You have to qualify for Chapter 7 bankruptcy, otherwise, the court will deny your case. 

The requirements for businesses are different from the requirements for individuals. Make sure you are aware of the differences and which ones apply to your situation. 

A Chapter 7 bankruptcy may stop a wage garnishment. That said, if you received papers for a wage garnishment, you may want to take a wage garnishment calculator to see how much you will be garnished each pay period. That can help determine whether the garnishment will be debilitating.

What is Chapter 13 Bankruptcy? 

This type of bankruptcy is one that gives debtors the opportunity to restructure their debts into a more suitable Chapter 13 repayment plan. A limiting factor with this type of bankruptcy is that it’s only available to individuals with a steady flow of income. Individuals that earn from businesses can also file under Chapter 13, however, their business cannot get a discharge under this bankruptcy plan. Businesses that want to restructure their debt can apply for a Chapter 11 bankruptcy instead. 

Most Chapter 13 bankruptcies have a 60-month term. However, a debtor may opt for a 36-month term if their income is below the state’s median income. The courts determine what an individual owes based on that person’s expenses, assets, debts, and income. In certain instances, their recent financial transactions also have a role to play in their Chapter 13 bankruptcy plan. 

In a Chapter 13 bankruptcy, you can often keep your house.

Pros and Cons of Chapter 7 Bankruptcy 

There are multiple advantages and disadvantages of bankruptcy to consider before filing for this type of bankruptcy. Here are some: 

Pros:

  • Chapter 7 bankruptcy offers one of the fastest ways to get rid of debt. The court discharges a good number of no-asset Chapter 7 cases in less than six months. 
  • Debtors don’t have to make any payment to a creditor prior to getting a bankruptcy discharge. 
  • There is such a thing as an affordable Chapter 7.
  • A debtor can simply surrender their collateral to the creditor to get rid of unsecured debt. It doesn’t matter if the property is worth less than the debt owed. Legally, creditors cannot pursue you for any leftover debt. 
  • Debt collection lawsuits is a common reason for bankruptcy. Often, many of the debts associated with the debt collection lawsuit would be discharged.

Cons:

  • Generally, exemptions do not protect luxury items. 
  • A chapter 7 trustee has the right to sell a property that bankruptcy exemptions don’t protect. 
  • Not all debt is discharged in Chapter 7 bankruptcy. Thus, the debtor may still owe some money even after the case has been closed. Debt that is non-dischargeable in bankruptcy includes child support, student loans, alimony, and most tax debts. 

 

Pros and Cons of Chapter 13 Bankruptcy 

There are numerous pros and cons to consider before filing for Chapter 13 bankruptcy. Unfortunate there are also instances where people have had bad experiences. Some pros and cons of this bankruptcy type include: 

Pros:

  • Chapter 13 bankruptcy helps to prevent repossessions and foreclosures. Not only is an automatic stay placed on your debts as soon as you file, but you are also given the ability to pay off what you owe over an extended period of time. This can help you keep your assets.  
  • Filing for a Chapter 13 bankruptcy plan can help secure assets that would have been at risk of liquidation if you had filed Chapter 7 bankruptcy
  • Stretch out your repayments into manageable installments over the course of 36-60 months.

Cons:

  • It costs more to pay for Chapter 13 attorney fees, but most attorneys include their fee in the Chapter 13 bankruptcy plan. 
  • Debtors can’t incur new debt or sell their assets without first seeking court approval in a Chapter 13 bankruptcy plan. 
  • Chapter 13 bankruptcy takes longer than Chapter 7 bankruptcy.

Bankruptcy may not be your only option. For example, many people compare debt settlement to Chapter 13 bankruptcy. You can also consider debt management, also known as credit counseling.

Factors to Consider When Choosing Between Chapter 7 and Chapter 13 Bankruptcy 

There are many things to consider before deciding between filing for Chapter 7 and Chapter 13 bankruptcy discharge. 

Income Requirements 

Making a choice between chapter 7 and chapter 13 bankruptcy can be somewhat challenging. One of the important factors to consider first is your income. It’s required that you meet the income requirement that’s determined by a Bankruptcy Means Test before you’re issued a bankruptcy discharge. 

If your income is above the requirement for a Chapter 7 bankruptcy, then you should consider Chapter 13 bankruptcy instead. This is especially true if you have enough disposable monthly income to make payments towards your debts, even if they aren’t quite hitting the minimums.

If you have become unemployed recently and have taken an unemployment calculator to estimate your benefit amount, your lower income may help you fall under the means test. That said, many people would prefer to be employed vs. unemployed, but it’s an interested, helpful thing to know.

Equity in Property and Assets 

You can only get protection on certain amounts of assets with a bankruptcy exemption. Assets that are worth above the allowed bankruptcy exemption could be lost in Chapter 7. But, with Chapter 13, you can simply enroll in a repayment plan to keep your property. 

Foreclosures and Repossessions 

If you’re falling behind in mortgage payments, then Chapter 7 bankruptcy isn’t a suitable alternative. It’s best to restructure your finances to help you catch up with required mortgage payments, apply for modifications, and refinance your mortgage loans. However, filing for a Chapter 13 bankruptcy prevents foreclosure by restructuring your payments. 

Also, if you find it challenging to make car payments, then Chapter 7 won’t offer you the needed protection. The lender may request that you make payment in full. You may be able to redeem your car if the amount you owe is worth less than what you owe on the car. 

For a Chapter 13 bankruptcy, payments can be spread out over a couple of years to reduce your payments. In certain instances, you may be able to reduce the amount you owe if the car is worth less than the loan payoff, and you’ve bought the vehicle over 910 days prior to filing for a Chapter 13 bankruptcy discharge. 

Conclusion

There’s no way to get around it: bankruptcy can be confusing. If you are at the point of considering bankruptcy, we’re sure it’s a hectic and frightening time. Despite this, it’s important that you do your research and make sure you are filing for the bankruptcy option that will best help you get out of debt and back to a point of financial stability. We hope this article gave you at least a little insight into the differences between Chapter 7 and Chapter 13 bankruptcy and you have a better idea of which option may be best for your situation. 

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