Bankruptcy, Chapter 7 & Chapter 13: What are the differences and impacts?

Is your debt larger than you can handle?

Are creditors sending you notices?

Are you worried you might lose your home?

Well you have options, and filing for bankruptcy is one of them. Yes, the word bankruptcy conjures up images of people who are irresponsible with their money. But you need to understand that even responsible and conscientious people have financial trouble as well.

Before you file for bankruptcy, you need to ask yourself the following questions:

  1. Do I have bills that I cannot afford to pay?

  2. Are creditors calling me to pay my bills because they are late?

  3. Are the creditors threatening to garnish my wages?

  4. Am I being threatened with repossession or foreclosure?

  5. Are my bills so large that I don’t ever expect to pay them in full?

  6. Do I know my legal rights when it comes to creditors and payment of my    bills?

  7. Do I want to keep my house and other possessions and can I afford to pay the monthly bills for them?

There are two forms of bankruptcy that affect individuals, Chapter 7 (liquidation) and Chapter 13 (reorganization). But which form of bankruptcy should you file for?

Filing for chapter 7 bankruptcy is appropriate when:

  • You find that you cannot repay your debt, not even with a repayment plan.

  • Your need to quickly get relief from your creditors.

  • Most of your debts are dischargeable (don’t need to be repaid) under    chapter 7. Dischargeable debts include: credit cards; personal loans; and medical bills; just to name a few.

Chapter 7 bankruptcy requires the debtor (person who owes the debt) to gather all of their property and to claim what assets they have. Common assets can include cash, investments, bank accounts, houses, cars, boats, jewelry, and like items. Each state has its own laws that govern what items a person can keep and what items must be turned over to the bankruptcy court for sale or liquidation. The courts then use the money they gather to pay back as much of the debt to the creditors (people or companies that the debtor owes money) as possible. When there isn’t enough money to pay the creditors in full, the courts release the remaining amounts due to them. This means the debtor no longer owes money to those creditors.

 

Filing for chapter 13 bankruptcy is appropriate when:

  • You do not qualify for chapter 7 bankruptcy.

  • You have debts that cannot be discharged under chapter 7.

  • You want to repay your creditors and will reasonably expect to do so with the money you have coming in.

  • You wish to keep your home, and continue making payments on it to prevent foreclosure.

  • You want to keep your automobile, and continue making payments on it in order to prevent repossession.

  • There is a co-debtor (someone who co-signs a loan with you).

  • You wish to keep nonexempt property (property that can be claimed by creditors).

  • You have debts that are not dischargeable under chapter 7. Those debts can include: marital debts from settlement agreements; court fees; and homeowners, condominium or cooperative fees.

Chapter 13 bankruptcy is used when individuals have valuable assets, such as a home, they wish to keep. In this case, the courts will restructure the debt payment plan so that the debtors can pay back the amounts they owe. The debt is often repaid at a lower interest rate over a period of 3-5 years, and to make sure that the debt is repaid, the courts monitor the repayment progress.

Whether you file for chapter 7 or chapter 13 bankruptcy, it’s important to remember that there are both positive and negative consequences associated with bankruptcy. Simply put, under chapter 7 you don’t have to repay your creditors, and under chapter 13 you do have to repay your creditors, however you have a longer period of time to pay them.  Always keep in mind, bankruptcy usually stays on your credit anywhere from 7-10 years.

The important thing is that you are doing your best to remedy a bad financial situation and move on with your life. You can start by talking with a reputable and qualified personal bankruptcy attorney. It’s not too late to improve your future.