What Is The Difference Between Chapter 7 And Chapter 13 Bankruptcy
If you do ultimately decide to file, one of the first big decisions you’ll make is whether to file Chapter 7 or Chapter 13 bankruptcy. These chapter names refer to sections of the U.S. Bankruptcy Code where it’s outlined how, exactly, your debt is taken care of in each process. The choice to file one or the other determines whether you’ll be put on a debt repayment plan or if your debts will be settled with the property you own. If you find yourself at a crossroads, start here to get a grasp on what’s ahead.
What Happens In Bankruptcies
What happens in bankruptcies depends on the person and the finances at the time of filing. As a general rule, when a person files bankruptcy, they are able to keep their home, vehicle, and personal belongings, along with some savings .
In general, bankruptcy is a strategy for debt elimination and a way to rebuild credit. As soon as a bankruptcy is filed, ALL COLLECTION activities must immediately stop. That includes any foreclosure activity, repossessions, wage garnishment, and enforcement of judgments.
People often ask us if there are any negative consequences of filing for bankruptcy. As a rule, bankruptcy will remain on a persons credit report for 7 years. However, a person will be still able to qualify for loans and credit cards after filing bankruptcy; frequently within 6-12 months.
Bankruptcy does not prevent a person from getting new home loans or car loans. In many cases, filing bankruptcy can actually boost a persons credit score. This makes sense because a person can only file bankruptcy once every 7 years. After a person files bankruptcy, creditors see them as good candidates for rebuilding credit and repaying loans.
How Much Cash Is Exempt In Chapter 7
If you are concerned about any of your assets, you need to speak to an experienced bankruptcy attorney in your area.;But what happens if you have a non-exempt asset?
Many people have questions and concerns about how much cash they can have in the bank when filing for bankruptcy.
If you declare bankruptcy, will you lose literally every dollar that you have in your savings?;The answer is no: some cash can be exempted in a Chapter 7 case.
For example, typically under Federal exemptions,;you can have approximately $20,000.00 cash on hand or in the bank on the day you file bankruptcy.
The vast majority of my clients have considerable less than $20,000.00 in the bank the day I file their bankruptcy. However, for the sake of my example, lets say, you had $23,000.00 in the bank the day I filed your bankruptcy. The Chapter 7 Trustee could technically take the amount over the exemption amount and pay that amount to your creditors.
So, you would keep $20,000.00 and the trustee would take $3,000.00 and give that to your creditors.
You would not owe your discharged creditors any more money and you still have a successful bankruptcy. While this example may seem extreme, I have worked on a bankruptcy where the individuals had more than $20,000.00 in the bank the day we filed their bankruptcy.
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Calculating Your Equity In Your Car
In simple terms, the equity in your vehicle represents the portion of the cars value that belongs to you. You can determine it by subtracting how much you owe the lender from its current fair market value .
For example, if the current car is worth $5,000. If you own the car outright and do not have any loan balance, then you have 100% equity in it. Your equity is equal to the fair market value which is $5,000.
If you have an auto loan balance and you still owe the car lender a total of $2,000, then you have to subtract that from the current value of $5,000. That leaves you with an equity of $3,000.
Scenario 1: 100% Equity or Lower than MVE
In this scenario, you can keep the car as long as its value is below the exemption amount. Lets say you have 100% equity and the FMV of your car is $3,000. If the motor vehicle exemption in your state is $4,000, then you can keep it.
Scenario 2: 100% Equity or Higher than MVE
The answer to whether you can keep your vehicle in bankruptcy will depend on how much higher your equity is compared to the motor vehicle exemption. Here are 3 sample scenarios that could happen when you filed for bankruptcy:
A. You have 100% equity and the FMV of your car is $15,000. If the MVE in your state is $4,000, then the remaining $11,000 is not protected. If this is so, the bankruptcy trustee sells your car and pays you $4,000 back. They will use $11,000 from the sales proceeds to pay your other debts and pay the cost of selling the vehicle.
What Happens When You Go Bankrupt
If the adjudicator makes you bankrupt:
- youll receive a copy of the bankruptcy order and may be interviewed about your situation
- your assets can be used to pay your debts
- youll have to follow the bankruptcy restrictions
- your name and details will be published in the Individual Insolvency Register
You can apply to have your address removed from the Individual Insolvency Register if publishing it will put you at risk of violence. This will not affect your bankruptcy.
After 12 months youre usually released from your bankruptcy restrictions and debts. Assets that were part of your estate during the bankruptcy period can still be used to pay your debts.
You might be able to cancel your bankruptcy before youre discharged.
Bankruptcy only applies to individuals. Find out what your options are if your limited company cannot pay its creditors.
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Chapter 7 Vs Chapter 13
Chapter 7 and Chapter 13 are the two most common types of personal bankruptcy.
In a Chapter 7 bankruptcy, a trustee appointed by the bankruptcy court will liquidate many of your assets and use the proceeds to pay your creditors some portion of what you owe them. Certain assets are exempt from liquidation. Those typically include part of the equity in your home and automobile, clothing, any tools you need for your work, pensions, and Social Security benefits.
Your nonexempt assets that can be sold off by the trustee include property , a second car or truck, recreational vehicles, boats, collections or other valuable items, and bank and investment accounts.
In Chapter 7, your debts are typically discharged about four months after you file your bankruptcy petition, according to the Administrative Office of the U.S. Courts.
In a Chapter 13 bankruptcy, by contrast, you commit to repaying an agreed-upon portion of your debts over a period of three to five years. As long as you meet the terms of the agreement, you are allowed to keep your otherwise-nonexempt assets. At the end of the period, your remaining debts are discharged.
In general, people with fewer financial resources choose Chapter 7. In fact, to be eligible for Chapter 7, you must submit to a means test, proving that you would be unable to repay your debts. Otherwise, the court may determine that Chapter 13 is your only option.
Bankruptcy And Noncustodial Parents
If youre a noncustodial parent who owes child support, bankruptcy does not waive your child support responsibilities. Learn if and how your case will change.
I filed for bankruptcy. Now what?
If you have filed for bankruptcy, it is important that you notify the Child Support Division immediately. The relationship between child support and bankruptcy is complex. Contacting our office can help you determine the next step regarding your child support case.
Do I still have to pay for child support?
Yes, you are required to continue paying child support despite being in bankruptcy. Your current payment obligations remain in effect. Any arrears or unpaid child support cannot be cleared because of bankruptcy.;
Your bankruptcy may be affected if you stop paying your child support. The Office of the Attorney General is required to comply with federal bankruptcy laws and can use several methods to enforce child support responsibilities.
- Learn more in our Child Support Enforcement section.
Can I modify my child support?
You may be eligible to have your support lowered by the court.;
To request a modification, you will need to show that you cannot meet your current obligation due to unemployment, reduced income, or a different change in circumstance.
- Learn more about modifying your child support.
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What Happens To Your Car After You File For Bankruptcy
Filing for bankruptcy doesnt have to mean your auto will end up on the back of a tow truck. But its important to know what happens to your vehicle because there are different rules in a bankruptcy case depending on your situation.
In a Chapter 13 bankruptcy, you go into a repayment plan for your debts so that youre able to keep your assets as long as you keep paying what was agreed. Whether you own the car already or you have a loan, its possible to keep it in a Chapter 13 bankruptcy. However, most people file bankruptcy under Chapter 7, so lets dive in on what you need to do to determine whether you can keep the vehicle.
How Long Do I Have To Wait After Chapter 13 To Get A New Mortgage
Rocket Mortgage and other lenders may give you the option of getting an FHA or VA loan as long as the Chapter 13 bankruptcy is discharged or dismissed before you apply.
If you’re looking to apply for a conventional loan, it matters whether your bankruptcy was discharged or dismissed. In the event of a Chapter 13 discharge, the discharge date has to be more than 2 years prior to the date credit is pulled and more than 4 years since the filing.
If the bankruptcy was dismissed, theres a 4-year waiting period until credit can be pulled for a new conventional mortgage.
Finally, jumbo loans still have a 7-year waiting period before you can apply.;
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Understanding Chapter 7 Bankruptcy Exemptions In Texas
Since I practice bankruptcy law in Texas, and 98% of the time I use Texas law to determine my clients exemptions, my comments are going to be directly specifically at Texas and Federal exemptions which I am allowed to use in Texas.
Under Texas and Federal exemptions, it is really hard to lose an asset in a bankruptcy.
The vast majority of the bankruptcies I have filed are no-asset Chapter 7 bankruptcies. That means I was able to exempt every asset the individual had,;so they kept all of their property.
To determine if you qualify for a no-asset bankruptcy, you should speak to an experienced Chapter 7 lawyer who can review your individual circumstances.
For your reference, I typically only work on one to two asset cases a year. That should give you some perspective as to how rare asset Chapter 7 bankruptcies are in Waco, Texas where I practice.
Dont File For Divorce And Bankruptcy At The Same Time
For the sake of simplicity, the two legal matters shouldnt overlap with each other. Commonly, people choose to file bankruptcy before going through with a divorce and there are several logical reasons for that. Once bankruptcy is filed, for both chapter 7 and chapter 13, an automatic stay is put into place. The automatic stay halts creditors from contacting you and puts a freeze on your assets and property this is so the bankruptcy court can begin sorting out what debts you owe and what assets you have that can help compensate for some of it. This hold is effective throughout the bankruptcy process.
Now lets say, you filed for bankruptcy and then immediately filed for divorce, causing the two to overlap. Since a large part of the divorce process is splitting up assets , the automatic stay would make it virtually impossible for the family court to access and divide the assets, since they are put into a hold. Because of this, the divorce could be dragged out longer than necessary and become more emotionally stressful for you or your loved ones.
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How Long Does A Bankruptcy Stay On Your Credit Report
Unfortunately, when you file for bankruptcy, it damages your credit severely. The notation that you filed for bankruptcy and your debts were discharged by the courts stays on your credit report for seven to ten years!
You may also have to sell personal assets like artwork, jewelry, and real estate to liquidate the assets to pay off some of your debt.
A poor credit rating and bankruptcy can affect your ability to get financing, buy a home, acquire insurance, and even get a job with some companies.
Ten years is a long time to suffer the consequences of poor financial decisions and mountains of debt. If there is any other way to handle your overwhelming financial situation, try and find one.;
How Long Does A Bankruptcy Take
While bankruptcy is an option that has been able to provide a fresh start for many individuals, families, and businesses it is a serious decision that should be carefully considered with the assistance of a financial advisor or attorney who can help determine if bankruptcy is the proper course of action.
Prior to 2005, those filing bankruptcy could choose the type of bankruptcy they preferred and most elected to file Chapter 7 straight bankruptcy over Chapter 13 . However, rules enacted in 2005 now requires those filing Chapter 7 to pass a “means test” to qualify, they must earn equal to or less than the average monthly income for a family of their size in their state.
In addition, before you can file for Chapter 7 or Chapter 13 bankruptcy, you are now required to complete credit counseling with an agency that has been approved by the United States Trustee’s office.
While bankruptcy plays a vital role to help rescue individuals and businesses, it is important to recognize that it’s not the only debt relief option.
This site is a free educational and motivational resource to help Texas residents. The free do-it-yourself educational resources, articles, and videos on this site, as well as links provided to state and federal hardship assistance are for informational purposes only and not to be construed as legal advice.
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What Documents Do You Need To File For Bankruptcy
Theres a heck of a lot of paperwork and forms and documents involved in bankruptcy, but lets talk about what you need to gather up at the start:
- Tax returns for the past two years or four years
- Income documents
- Mortgage information
- Vehicle information
- Retirement information
- Other documentation showing any other debts or expenses, like alimony or child support
Yes, thats a lot. Bankruptcy is not an easy out! Also, your particular state or court system may require more. Get ready to do a lot of hunting and have a lot of patience here.
Which One You Should File First Depends On Your Situation
Although you shouldnt file for divorce and bankruptcy at the same time, you can still choose which process to take care of first. While it is ultimately up to you, there are a few things to consider before determining which to file first. If you and your spouse are on amicable terms, it may be best to first file bankruptcy. Filing bankruptcy first allows you both to share the cost of attorney and filing fees and could possibly protect you from paying joint debt which could be beneficial if you and your spouse own property together.
Some jurisdictions also allow double exemptions on assets if you file joint bankruptcy; for instance, if your home is exempt up to $50,000 with a single bankruptcy, some jurisdictions could allow a double exemption, allowing the home to be exempt up to $100,000. Since exemption laws vary from district to district, its always beneficial to consult a bankruptcy attorney in your area to see what options are available for you. Filing for bankruptcy first also simplifies the division of assets in divorce because they are typically divided during the bankruptcy process although they can sometimes change.
If you and your spouse choose to file for chapter 7 bankruptcy, your joint income might put you over the income threshold for filing. If your individual incomes are below the threshold, you may want to explore the options of filing for divorce before bankruptcy.
3. Chapter 7 is ideal for a quick divorce
4. Not all debts are included in bankruptcy
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When The Court Dismisses The Bankruptcy Case Without A Discharge
Sometimes a bankruptcy case doesn’t make it all the way to discharge . When the case gets dismissed rather than discharged, the lawsuit that was pending can resume because the automatic stay no longer applies. For this reason, many courts will suspend the case rather than end it on the chance that the bankruptcy is dismissed and the parties choose to continue with the suit.
Filing Bankruptcy Can Be Expensive
The bankruptcy court charges a $338 filing fee for Chapter 7 cases. If you earn more than 150% of the federal poverty guideline, you have to pay this filing fee. Itâs possible to file your case and pay the fee in up to 4 payments if you canât pay it all at once. But, if you donât pay it in full, your case will be thrown out by the court.Â;
If you hire a law firm or bankruptcy lawyer to help you, youâll have to pay their attorney fees in addition to the court filing fees. That usually comes out to an average of about $1,500 that has to be paid before your case is filed. And thatâs on top of the filing fee and the cost of taking the required credit counseling courses.
Depending on your financial situation and the goals you want to accomplish with your bankruptcy filing, hiring the right bankruptcy lawyer for your case can be a great investment. But, a lot of Chapter 7 cases are simple and can be successfully completed without a lawyer.Â;
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