Chapter 13 Compared To Chapter 7 Bankruptcy
There are two main ways to file personal bankruptcy under the U.S. Bankruptcy Code: Chapter 7 and Chapter 13 bankruptcy.
Chapter 7 essentially erases most of your debts in a “liquidation” bankruptcy. Typically, if you have assets that aren’t exempt from liquidation under state or federal law, you must give them away to be sold. Chapter 7 doesn’t include a repayment plan because the money from selling items covers debt, and the rest of what you owe is dismissed.
Chapter 13 does not sell your property and uses your current income to repay debt. You can still lose some nonexempt property if you cannot afford to pay it through your repayment plan, however.
What Does My Bankruptcy Trustee Do
In Chapter 13, the trustee will manage your case and get you from A to Z. They will request information from you, communicate with creditors, and hold a creditors meeting.
You are responsible for filing a repayment plan with the court. Your trustee will also look this over and help answer questions along the way.
What Are My Obligations Under Chapter 13
Filing for Chapter 13 lets you keep your property and repay creditors over time in a three or five-year repayment plan:
- If your current monthly income exceeds your state’s median income, you must repay creditors in a five-year plan. Your income is your average income for the past six months before filing for bankruptcy.
- If your current monthly income is equal to or less than your state’s median income, you can repay creditors in a three-year plan. This may be up to the bankruptcy court in your area.
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Advantages Of Filing For Chapter 13 Bankruptcy
There are advantages that address the drawbacks of Chapter 13 bankruptcy. While it generally takes longer in Chapter 13 to pay off your debts, you’ll have more time to make your payments, and Chapter 13 trustees may be flexible on the terms of your payments. For instance, you may be able to:
- stretch out your debt payments,
- reduce the amounts of your payments, or
- give up an item of your property that you’re making payments on.
Note that once you successfully complete a repayment plan under Chapter 13, individual creditors can’t obligate you to pay them in full.
Further, although a Chapter 13 bankruptcy will stay on your record for years, it is a small trade-off for missed debt payments, defaults, repossessions, and lawsuits that could hurt your credit even more and be harder to explain to a future lender than bankruptcy.
In many cases, declaring bankruptcy can get you started sooner on rebuilding your credit. While you can only file under Chapter 7 once every 6 years, you can always get a Chapter 13 plan if you encounter another financial disaster before you’re entitled to file for Chapter 7. In other words, you may file for a Chapter 13 plan repeatedly .
The Chapter 13 Payment Plan
The hallmark of a Chapter 13 case is its payment plan. The payments last from 36 to 60 months and may include an amount that will go to unsecured creditors, past-due taxes, and past-due home mortgage amounts. It may even include car or house payments and some portion of your attorney fees. The payment plan is designed to:
- Help make payment of unsecured debts like medical bills and credit cards more affordable and manageable.
- Provide a way to pay past-due house, car, income tax, child support, and alimony payments over time.
- Substitute for the need to sell or turn over the nonexempt property.
The types and amount of debt you owe determine what your payments will be, as well as your income and your reasonable and necessary expenses.
Some flexibility can be built into payment plans and budgets to account for the unexpected, but it is difficult even for experienced bankruptcy attorneys and Chapter 13 trustees to account for everything that might happen.
You may not know for months after your case is filed if your proposed plan payments are acceptable to the Bankruptcy Court and the Chapter 13 Trustee. The trustee will verify your income and make sure your expenses are not too high. It takes several months for creditors to file claims and for all the players to review those claims. If you disagree with a claim, the bankruptcy judge may have to decide the dispute. This process can take several months to a year to complete.
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The Downsides Of Chapter 7 Bankruptcy
Since Chapter 7 bankruptcy is by far the most common – and often preferred – type of bankruptcy, letâs start with a look at some of its downsides.
The bankruptcy trustee can sell any property not protected by an exemption
Bankruptcy exemptions protect most âbasicâ property – things like clothing, furniture, retirement accounts, and – at least up to a certain amount – cars. The state youâre filing bankruptcy in determines the type of bankruptcy exemptions youâre able to use. That’s because the Bankruptcy Code gives each state the option to require their residents to use state law instead of bankruptcy law to protect their belongings. If you own non-exempt property and donât want it to be used to pay at least a portion of your debts, a Chapter 7 âliquidation bankruptcyâ may not be right for you. Chapter 13 allows you to keep nonexempt property.
It doesnât help with expensive car loans if you want to keep the car
Even though bankruptcy law allows you to keep your not-yet-paid-off car even after filing a Chapter 7 bankruptcy, youâll likely be stuck with the same car loan. After signing a reaffirmation agreement, most Chapter 7 filers are stuck with the same high interest rate on their loan and often owe much more on it than the car is worth. This can seriously lessen the positive impact your fresh start will have on your monthly budget.
It doesnât help with non-dischargeable debt or past due mortgage obligations
The Chapter 13 Hardship Discharge
After confirmation of a plan, circumstances may arise that prevent the debtor from completing the plan. In such situations, the debtor may ask the court to grant a “hardship discharge.” 11 U.S.C. § 1328. Generally, such a discharge is available only if: the debtor’s failure to complete plan payments is due to circumstances beyond the debtor’s control and through no fault of the debtor creditors have received at least as much as they would have received in a chapter 7 liquidation case and modification of the plan is not possible. Injury or illness that precludes employment sufficient to fund even a modified plan may serve as the basis for a hardship discharge. The hardship discharge is more limited than the discharge described above and does not apply to any debts that are nondischargeable in a chapter 7 case. 11 U.S.C. § 523.
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Chapter 13 Bankruptcy Repayment Plan
Chapter 13 debtors create their own repayment plan, which must be written and submitted to the bankruptcy court at the outset of your case. The federal bankruptcy court provides a form for drafting a plan, or you can obtain one from a lower court in your area. The bankruptcy court must approve your plan for you to enter Chapter 13. The plan details your income, property, expenses and debts and includes a proposed payment plan.
A trustee will be assigned to review your plan, assess its compliance with bankruptcy laws, collect your payments and distribute them to creditors, and make sure all terms in your bankruptcy repayment plan are followed.
Your repayment plan will be divided into categories, which include:
Creating And Filing The Repayment Plan
Once the means test is complete, you can start to work on drafting the repayment plan itself. The details of the plan will depend on your unique debts and the disposable income you calculated during the means test, so we strongly advise that you work on it with a trained expert like a bankruptcy lawyer. Not all Chapter 13 filers need the same advice for creating a repayment plan.
After you create your repayment plan, youll need to file it with the bankruptcy court no later than 14 days after filing. The court will assess the plan and hold a hearing to give your creditors a chance to make any objections. If all goes well, the plan will be approved. Keep in mind that although approval may not happen until roughly three months after filing, youll still have to start making payments on the plan within 30 days after you file.
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Chapter Thirteen Bankruptcy: An Overview
ï»¿Chapter13 Bankruptcy: An Overview
Bankruptcy is an overwhelmingprocess. A debtor may wonder âWhat assetscan I keep?â and âWhat is thequickest and most painless way for me to satisfy my debts?â When scouringthe Internet to find answers to these questions, many self-help websites boldlyproclaim, âKEEP YOUR VALUABLE PROPERTY WITH CHAPTER 13!â and âCHAPTER 13 WORKEDFOR HIM & WILL WORK FOR YOU!â Lawyers have commented that Chapter 13 bankruptcyis âinnovativeâ in its approach and âextremely attractive.â
When first enacted, Congressenvisioned Chapter 13 as a method to provide âgreat self-satisfaction and prideto those debtors who complete them and at the same time effect a maximum returnto creditors.âWhat is it and how does it work?
In a Chapter 13 bankruptcy plan, thedebtor proposes a repayment and reorganization plan to the bankruptcy court. The repayment plandescribes in detail how a debtor will make payments to a Chapter 13 trustee,who will then distribute payments to creditors over a three-to-five year period. To approve the plan, thecourt must find that âthe plan has been proposed in good faith.â Good faith exists âwhenthere is a reasonable likelihood that the plan will achieve a result consistentwith the objectives and purposes of the Bankruptcy Code.â
Â· Debtsarising from property settlements in divorce proceedings
Â· Debtsincurred to pay non-dischargeable tax obligations and
Â· Debtsfor malicious injury to property
What Is Chapter 13 Bankruptcy
Chapter 13 is a type of consumer bankruptcy. It is called Chapter 13 because it is the 13th Chapter of the U.S. Bankruptcy Code . If you are facing significant debt, you may be able to file for Chapter 13 to reorganize the debt so it is more manageable.
A Chapter 13 plan uses your regular disposable income to eliminate debts over three to five years. You will make monthly payments to cover your debts, and then some of your remaining debt will be discharged.
Learn about other Chapter 13 topics below:
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How Does Bankruptcy Work
Bankruptcy is a method to eliminate or at least reduce your debt when bills pile up beyond your ability to repay them. It should be viewed as a last resort to be considered only when all other potential courses of action to get back on track have been exhausted.
Individuals filing for bankruptcy mostly use either Chapter 7 or Chapter 13. The biggest difference between the two is what happens to your property:
- Chapter 7, which is known as liquidation bankruptcy, involves selling some or all of your property to pay off your debts. This is often the choice if you don’t own a home and have a limited income.
- Chapter 13, also known as a reorganization bankruptcy, gives you the chance to keep your property if you successfully complete a court-mandated repayment plan that lasts between three and five years.
Depending on where you live and your marital status, some of your property may be exempt from being sold when you file Chapter 7 because of state-specific and federal exemptions. With exemptions, whether they be your home equity, retirement accounts or even personal possessions such as jewelry, you receive the allowed exemption amounts, and the rest of the proceeds will be used to pay off debts. You can read more about potential exemptions, and check out this chart for a quick rundown on the two types:
- Child support or alimony
- Student loans
Beware Of Debt Consolidation In Minnesota
You think to yourself, there has to be a better way. You simply cannot continue to juggle servicing these payments on this pile of debt. You think about traditional debt consolidation but you have heard horror stories. The trouble with traditional debt consolidation programs is creditors eat first, you eat last. If you do not pay creditors what they demand, the creditor then pursues their legal remedies and proceeds to garnish your wages. You say, well wait a minute, I am in a debt consolidation plan with my 22 creditors and all but 2 of the creditors have acquiesced to the plan.
Since 2 of the 22 creditors refuse to play ball, you have the spectacle of 2 creditors getting paid a lot and 20 creditors getting paid squat. Trouble is you cannot afford to be garnished AND pay a debt consolidation payment too. Besides, if any debt is forgiven in debt consolidation, guess who gets to pay taxes on the debt forgiven? You do. Now, paying taxes on forgiven debt is better than paying the underlying debt, but you still have to pay the taxes. Finally, debt consolidation looks terrible on your credit. Why? Because you are advertising to the world, you are in financial distress.
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Your Credit Will Take A Hit
Bankruptcy can have a more severe negative affect on your credit than mere missed payments. A Chapter 13 bankruptcy will appear on your credit reports as a derogatory mark for seven years from the date you filed the petition. The number of points your will drop will vary depending on your current scores and other factors relating to your financial situation. For more on this, check out our article on how to build credit after a bankruptcy.
The Cost Of Chapter 13
Attorneys fees in Chapter 13 are usually paid in part before the case is filed, with the unpaid balance paid by the trustee from the payments the debtor makes into the plan.
With the increase in attorneys fees for all bankruptcy proceedings necessitated by bankruptcy reform in 2005, Chapter 13 may be a way to pay for good legal representation over time.
If the case is more complex or there are contests to confirmation or the allowance of a claim, the attorneys fees may exceed the initial fees set out at the beginning of the case.
The court must consider requests for additional attorneys fees, and if the request is approved, the additional fees will be added to the debts paid through the plan.
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Should I File Chapter 13 Bankruptcy
Entering bankruptcy is a major financial decision with consequences that can impact your creditworthiness for years. Though local, state and federal government agencies cant consider bankruptcy when deciding whether to hire you, private employers face no such restriction. Given the gravity of the decision, it pays to explore all options before filing a bankruptcy petition.
InCharge Debt Solutions, a nonprofit credit-counseling and debt-management firm, offers a variety of services to help you make the best decision. If you decide that bankruptcy is the best option for you, InCharge can help you through the process. It provides approved bankruptcy education courses and offers both pre-filing and pre-discharge bankruptcy education through its PersonalFinanceEducation.com website.
Talk To A Bankruptcy Lawyer
Need professional help? Start here.
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The Chapter 13 Discharge
The bankruptcy law regarding the scope of the chapter 13 discharge is complex and has recently undergone major changes. Therefore, debtors should consult competent legal counsel prior to filing regarding the scope of the chapter 13 discharge.
A chapter 13 debtor is entitled to a discharge upon completion of all payments under the chapter 13 plan so long as the debtor: certifies that all domestic support obligations that came due prior to making such certification have been paid has not received a discharge in a prior case filed within a certain time frame and has completed an approved course in financial management . 11 U.S.C. § 1328. The court will not enter the discharge, however, until it determines, after notice and a hearing, that there is no reason to believe there is any pending proceeding that might give rise to a limitation on the debtor’s homestead exemption. 11 U.S.C. § 1328.
The discharge releases the debtor from all debts provided for by the plan or disallowed , with limited exceptions. Creditors provided for in full or in part under the chapter 13 plan may no longer initiate or continue any legal or other action against the debtor to collect the discharged obligations.
Chapter 13 Bankruptcy And Its Affect On Your Taxes
Filing for a Chapter 13 bankruptcy does not have an effect on taxes. Hence you must file your tax returns, and pay taxes as usual. Any past tax which is due but you have struggled to pay can be included in your payment plan. There is the possibly of getting an extension for a tax return if necessary, the details for this can be found on the IRS official website. It is equally important that failing to pay taxes during your Chapter 13 bankruptcy will have a negative impact on your case.
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