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Chapter 7 Vs Chapter 13: Which Should You File
Before filing for bankruptcy, your first step should be contacting a professional to help you determine whether Chapter 7 or Chapter 13 is right for you. And of course, you must refer to the limits above to see if Chapter 7 is even a possibility. Otherwise, read below for some more considerations that might indicate whether Chapter 7 or Chapter 13 is better for your situation.
Chapter 7 might be appropriate if:
- It would take 5 or more years to pay off your debt even if you took all available measures.
- You have limited assets.
- Your problem debts total more than 40% of your annual income, so its unlikely youll be able to repay your creditors.
Chapter 13 might be the right choice if:
- Youre behind on your mortgage or car loan but would prefer to get current on payments rather than lose your property.
- You feel youd be able to be current on your debts if you had more time.
- You have nonexempt property that youd like to keep even at a cost.
Chapter 13 Bankruptcy Can Protect Individuals That Cant File Chapter 7
Not everyone is eligible to file Chapter 7. Perhaps they have excess disposable income and fail the means test. Or they risk losing assets that cant be protected in a Chapter 7 bankruptcy.
Even if a Chapter 7 cant be filed, protection under Chapter 13 is almost always available if individuals have a regular source of income, and their total unsecured debts are less than $394,725, and their non-contingent, liquidated, secured debts are less than $1,184,200.
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Advantages Of Chapter 13
Chapter 13 offers individuals a number of advantages over liquidation under chapter 7. Perhaps most significantly, chapter 13 offers individuals an opportunity to save their homes from foreclosure. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. Nevertheless, they must still make all mortgage payments that come due during the chapter 13 plan on time. Another advantage of chapter 13 is that it allows individuals to reschedule secured debts and extend them over the life of the chapter 13 plan. Doing this may lower the payments. Chapter 13 also has a special provision that protects third parties who are liable with the debtor on “consumer debts.” This provision may protect co-signers. Finally, chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under chapter 13 protection.
What You Should Do After Filing For Bankruptcy
In addition to following all court orders and plans that have been approved, youll want to get to work rebuilding your credit. Your credit report wont look clean for a while; a Chapter 7 bankruptcy stays on your report for 10 years and a Chapter 13 slides off after 7 years.
And while its true that lenders might cast a wary eye on extending credit to someone with a bankruptcy on their credit report, you can still start implementing better financial wellness habits right away. Some places to begin are:
- Reviewing your : Make sure all the accounts show that theyve been discharged or are listed as included in bankruptcy rather than as delinquent or outstanding so creditors dont continue to harass you.
- Applying for an entry-level : A card with a low limit is a good way to get back on your feet credit-wise.
- Reinforcing smart financial habits: Ideally your credit counseling classes will offer smart strategies for responsible financial management, such as budgeting. One of the most important things you can do for solid credit is to pay your bills on time, every time. Create new habits and youll be well on your way to rebuilding your financial life with your bankruptcy behind you.
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Chapter 13 Bankruptcy Pros And Cons
Here is a list of the benefits and the drawbacks to consider.
- Lengthy procedure: three to five years to complete.
- Stays on your credit report for seven years.
- Negatively affects credit scores .
- Debts are paid from disposable income, meaning whatever income is left after paying for the necessities. You wont have muchif anyextra cash.
- Can make it difficult to get a mortgage if you dont already have one.
- Best to hire an attorney, which can make the process very expensive.
How Do Bankruptcies Affect A Joint Mortgage
If one person files for bankruptcy, that can have an impact if you both are on the mortgage. There are instances where one persons bankruptcy can cause issues with keeping the home, even if more than one of you is on the mortgage. In order to be fully apprised of what can happen, talk to your attorney.
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How Does Filing Bankruptcy Impact Credit
Your credit may not be in tip-top shape by the time you consider filing for bankruptcy, since high balances and missed payments are the top factors affecting your credit score. Still, the presence of a bankruptcy on your credit report will severely impact your credit scores and creditworthiness the entire time it is on your report. That impact will lessen as time passes, however. Chapter 7 bankruptcy remains on your report for up to 10 years, and Chapter 13 stays there for up to seven years.
It’s not an ideal credit situation, of course, but you can use the time to manage your debts wisely and make consistent on-time payments. Like with any damage to your creditworthiness, it’s possible to rebuild your credit with some focus and patiencealong with using the debt relief provided by the bankruptcy to get back on track financially.
Paying Creditors For Home Equity In Chapters 7 And 13
Your creditors will receive the value of any nonexempt property that you can’t cover with a bankruptcy exemptioneven if you file for Chapter 13. Although creditors receive an equal amount in both Chapters 7 and 13, creditors get paid differently. Here’s how it works.
Chapter 7 is designed to give low- or no-income filers debt relief. Because these filers don’t have sufficient income to repay creditors, the Chapter 7 trustee sells nonexempt property and distributes the proceeds. By contrast, Chapter 13 helps those who can afford to pay some amount to creditors. Instead of selling property, the Chapter 13 trustee collects the value of the nonexempt property through the repayment plan and distributes the funds to creditors. In essence, a Chapter 13 debtor must pay to keep nonexempt property.
Example. Pranav has $50,000 of exempt equity and $30,000 worth of nonexempt equity in his home. If he files for Chapter 7, the trustee will sell Pranav’s house, give him $50,000, and distribute the remaining $30,000 to his creditors . If Pranav files for Chapter 13, Pranav will have to pay at least $30,000 to creditors through his Chapter 13 plan .
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How Is Chapter 7 Different From Chapter 13 Bankruptcy
On the surface, Chapter 7 and Chapter 13 seem similar. For example:
- Both are versions of bankruptcy.
- Both are controlled by federal laws.
- Both require debtors to take financial classes.
- Both grant opportunities to wipe out debt.
However, while both chapters share the same goal destination debt relief and improved financial health they follow different routes to get there.
What About Chapter 13 What Happens With My Existing Mortgage
With a chapter 13 bankruptcy, borrowers will not lose their property. You will include details on how you plan on paying your mortgage in your repayment plan. In most cases, an automatic stay is issued once Chapter 13 is filed. An automatic stay means that creditors must stop collection efforts.
It was designed to temporarily halt foreclosure and stop repossession of homes regardless of the stage of the foreclosure proceedings. For homeowners with too much equity to qualify for a homestead exemption in their jurisdiction, this is an advantage of a Chapter 13 filing.
There are a couple of important caveats here: First, you have to stay current on any mortgage payments that are due after the filing. If youre behind on your payments, missed payments can be included in your reorganization plan, but you have to make sure all these debts are paid back by the end of your plan timeline.
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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:
Section 341 Meeting Of Creditors And Trustee
The debtor and his attorney are required to attend a meeting with the Chapter 13 bankruptcy trustee or the trustees attorney approximately four weeks after the bankruptcy filing date. The meeting is held in a meeting room not a courtroom and the federal bankruptcy judge is prohibited by law from being there. Typically, this meeting will last about five to ten minutes. Creditors rarely attend.
At the;, the Chapter 13 trustee or his attorney will ask the debtor questions, but they will not interrogate, cross-examine, or threaten the debtor. The trustee may give the debtor payment envelopes with the trustees mailing address for future plan payments . The trustee may suggest changes to the debtors initial Chapter 13 plan. Most debtors submit one or more amended plans during the Chapter 13 bankruptcy as creditors file their claims.
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Is Filing A Chapter 13 More Difficult Than Filing A Chapter 7
Even though the majority of the forms are the same, filing a Chapter 13 is much more difficult than filing a Chapter 7. As part of the case, the filer has to propose a plan of reorganization that meets all of the requirements set forth in the Bankruptcy Code. And even though most districts use some version of a model plan, taking full advantage of all that Chapter 13 has to offer typically takes a knowledgeable bankruptcy attorney.Â;Â;
The Chapter 13 Process
First, you should find a bankruptcy lawyer who can provide you with a free evaluation and estimate to file.
The cost to file Chapter 13 bankruptcy consists of filing fees and fees charged by a bankruptcy attorney. Petitioners need to pay a $313 filing fee to the bankruptcy court. They also need to provide:
- A list of creditors and the amount of their claims
- Disclosure of the amount and sources of the debtors income
- A list of the debtors property, as well as an accounting of all contracts and leases in the debtors name
- A breakdown of the debtors monthly living expenses
- Tax information, including a copy of the debtors most recent federal tax return and a statement of any unpaid taxes.
Chapter 13 petitioners must stipulate that they havent had a bankruptcy petition dismissed in the 180 days before filing due to their unwillingness to appear in court. Also, anyone seeking bankruptcy protection, must undergo from an approved agency within 180 days of filing a petition.
Shortly after filing bankruptcy, the debtor also must propose a repayment plan.; A bankruptcy judge or administrator will hold a hearing to determine whether the plan meets the requirements of the bankruptcy code and is fair. Creditors may raise objections to the plan, but the court has the final say.
Debtors can arrange to make up delinquent payments over time, but under Chapter 13 rules, all new mortgage payments from the time of filing must be made on time.
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Chapter 7 Vs Chapter 13: Overview Of Key Differences
Known as a liquidation bankruptcy, individuals filing for Chapter 7 must sell their assets that are secured. This could include a house or a car. Only then will the rest of their unsecured debt be discharged, and they wont have to pay it back.
Only individuals who pass a means test are eligible to file for a Chapter 7 bankruptcy.
By contrast, a Chapter 13 bankruptcy is known as a reorganization bankruptcy. Youll create a repayment plan which will allow you to pay your creditors a defined amount over a set period of time rather than selling your property. Once youve paid off the agreed-upon portion of your debt, your other unsecured debts may also be discharged.
Negotiating With Other Creditors
While your mortgage is significant, its obviously not your only bill. Other lenders and creditors may work to negotiate with you if you can go through the process of proving hardship. If you can come to an agreement, you may be able to settle your debt, even if its less than what you owe.
It can be tempting to let unsecured debt default, but doing this will really hurt your credit score. Instead, we suggest working something out. Paying something may make a creditor more receptive to giving you some debt relief.
Theres still a credit ding that comes along with having an account thats paid as agreed rather than being paid in full, but its better than having an account that goes to collections or charge-offs. Some money is better than no money, and it does help lessen the effect on your credit score.
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The Chapter 13 Repayment Plan
The central part of your Chapter 13 case is the repayment plan that you’ll propose to your creditors and the court. Amongst other things, the plan must take into account each of your debts. You’ll use either the official plan form or your court’s local form, depending on where you file.
Your creditors and the bankruptcy trustee will have an opportunity to object to your plan. If you’re able to make changes to everyone’s satisfaction, the court will likely approve your plan at the confirmation hearing. You won’t wait until plan confirmation to start paying your monthly payment, however. Your payments will begin the month after you file.
Here are some examples of debts you’ll repay in Chapter 13 bankruptcy.
Although the repayment length will depend on how much you earn, most filers will have a five-year plan. The only exception is that a three-year plan is available to people who qualify to file a Chapter 7 case but choose to file a Chapter 13 bankruptcy insteadâperhaps to save a house or car, or to pay off a priority debt, such as child support arrearages or taxes. Even so, because the monthly payment will often be significantly lower over five years, it’s common for filers to opt for the more extended planâprimarily because it increases the likelihood that the court will confirm the plan.
Can Chapter 7 Bankruptcy Discharge Traffic Fines
Unfortunately, there are certain types of debts that are not discharged in a Chapter 7 bankruptcy and traffic fines are one of them. The types of traffic fines that are non-dischargeable include: traffic violations, traffic tickets, parking tickets, toll violations and court fines. Even though these fines are not dischargeable in a Chapter 7 bankruptcy, you may be able to eliminate these debts by filing a Chapter 13 bankruptcy instead. In a Chapter 13 bankruptcy, you will enter into a 3-5 year repayment plan which will allow you time to pay these fines off. This can be especially helpful if your driverâs license has been suspended. If you can show that you are in a bankruptcy repayment plan making monthly payments on your fines, you may be able to get your license reinstated. You can speak with a bankruptcy attorney to help you decide if you should file a Chapter 13 bankruptcy to help you.
Eligibility For Chapter 13 In Florida
Only Florida residents can file Chapter 13 bankruptcy in Florida.;The Chapter 13 debtor must have sufficient income to make current payments to his secured creditors throughout the bankruptcy . The debtor is required to pay his disposable family income for the benefit of his unsecured creditors. The Chapter 13 debtor must pay all disposable income to unsecured creditors until his creditors are paid in full or for five years, whichever comes first, and the debtor must pay his unsecured creditors though the bankruptcy at least as much as they would receive from your nonexempt property if the debtor had filed a;liquidating Florida Chapter 7 bankruptcy.
Chapter 13 bankruptcy has eligibility debt limits of approximately $419,000 of unsecured debt and approximately $1,277,000 of secured debt . People with debt above these limits are not eligible to file a Chapter 13 bankruptcy. Unsecured debts include personal loans, medical bills, and credit cards issued by banks and other credit cards used to purchase consumable items such as clothing, food, vacations, etc. Secured debts include those debts where the creditor has a security interest in your property to guarantee.