Pros And Cons To Chapter 7 Bankruptcy
While there are many pros to filing bankruptcy, there are cons attached. While you are able to receive relief and get your financial health in better shape, you may see a decrease in your credit score after filing Chapter 7. You can also find an affordable Chapter 7 bankruptcy, which is a pro to many people.
If You’re Thinking About Bankruptcy You’ll Need To Consider Which Type Is Right For You Here Are The Highlights
By Cara O’Neill, Attorney
Once you’ve decided that bankruptcy is the right solution for your financial situation, you will need to decide which type of bankruptcy is most beneficial.
If you are an individual or a small business owner, then your most obvious choices are Chapter 7 “liquidation” bankruptcy or Chapter 13 “wage earners” or “reorganization” bankruptcy.
We’ll go over the pros and cons of each, the eligibility rules, and give you some information to help decide which would be best for you in your financial situation.
There are a select few other types of bankruptcies that are available under certain circumstances, and we will touch on those as well.
Benefits And Setbacks To Chapter 7 Bankruptcy
Chapter 7 bankruptcy, also known as the liquidation bankruptcy, is the process where you are wiping your unsecured debt and any assets that are not protected under your states bankruptcy exemptions. If there are any assets that are wiped out in a Chapter 7 bankruptcy, the cash attached will be used to repay your creditors.
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Chapter 7 Vs Chapter 13 Bankruptcy In 2021
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In a Nutshell
Chapter 7 bankruptcy vs. Chapter 13 bankruptcy: Learn the differences, which type of bankruptcy is better depending on the situation, and the downsides of each.
Written byAttorney Andrea Wimmer. Â;
Chapter 7 and Chapter 13 bankruptcy are the two most commonly filed types of bankruptcy. Each is a legal tool to get debt relief if youâre no longer able to keep up with your minimum payments. Which one of these bankruptcy options is right for you depends on your financial situation and goals for the future. Even though there are many differences between Chapter 7 and Chapter 13 bankruptcy, each one grants the filer a fresh financial start in the form of a bankruptcy discharge. The discharge is a court order that permanently bans creditors from trying to collect money from you.Â;
After a brief overview, this article will explore the differences between Chapter 7 and Chapter 13, which type of bankruptcy is better depending on the situation, and the downsides of each.Â;
Cons Of Chapter 13 Bankruptcy
- It can take as many as five years to repay your debts.
- Your disposable income that money you have after necessities are paid is obligated to payments for the duration of the plan.
- Your credit score will take a massive hit.
- Bankruptcy debtors lose their credit cards which exist on the date they file.
- Like Chapter 7, Chapter 13 cannot get you out of student loan debt .
- Chapter 13 bankruptcy debtors still have to make payments for domestic obligations, such as alimony and child support.
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Eligibility Requirements For Chapter 7 And 13
To qualify for Chapter 7 bankruptcy, you must pass the means test. The means test looks at your average monthly income for the six months preceding your filing date and compares it against the median income for a similar household in your state. If your income is below the state median, you automatically pass and do not have to fill out the entire form. If it is above median, you must complete the rest of the form and take into account certain expenses to determine if your disposable income is low enough to file for Chapter 7 bankruptcy.
In Chapter 13 bankruptcy, you propose a repayment plan to pay back some or all of your debts over a three to five-year period. As a result, you must have sufficient income to afford your plan payments each month. Further, to qualify for Chapter 13 bankruptcy you can’t have more than $1,257,850 in secured debts and $419,275 in unsecured debts for cases filed before or after April 1, 2019).
To learn more, see The Means Test in Chapter 7 Bankruptcy and Debt Limits for Chapter 13 Bankruptcy
Can You Keep Your House In Chapter 7 Vs Chapter 13
Your house is your castle, so when you file for bankruptcy, youre going to want to protect your home. Thats why many homeowners wonder what happens if they file for Chapter 7 bankruptcy instead of Chapter 13 bankruptcy.
You may be able to keep your house in either chapter 7 or chapter 13. In chapter 7 cases, you may keep your house without having to pay any money if there is no nonexempt equity available.
In chapter 13 cases, you will have to declare how you are paying the mortgage, including any arrears, in your chapter 13 plan.
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What Is The Process For Filing For Bankruptcy
It is a sad fact that bankruptcy can be costly. This is even more true if you hire legal representation. .;All petitions must be filed in the U.S. bankruptcy courts. Filing fees for Chapter 7 are $335, and Chapter 13 is $310.;
However, you can petition the court for a waiver of your charge or allow you to make monthly payments.;You will also need to take debtor education classes if you file your own case.
This is just the beginning.;You will need to fill out a list of papers and a Chapter 13 repayment plan.;Before accepting your plan, a court-appointed trustee reviews it and contacts your creditors.;The filing of either file is not an easy task. Even small mistakes can jeopardize your case.
It doesnt matter if you file for Chapter 7 or Chapter 13 bankruptcy, it is a smart idea to hire an attorney to help you with your petition. ;lawyer will vary depending on your cases complexity.;
Chapter 13 filings are the most costly, but that doesnt mean you should not get one.;Talk to potential attorneys to discuss payment arrangements. The cost of a bankruptcy You can also look for pro-bono lawyers in your area and legal aid agencies. Or, you can use an online service such as Upsolve.
Are There Property Limits For Debtors Filing Under Bankruptcy Chapter 7 Vs Chapter 13
While there are no property limits for debtors filing under either form of bankruptcy, chapter 7 vs chapter 13, the reality is that your case depends on property you may exempt. As discussed previously, in a chapter 7 bankruptcy, you can keep exempt personal property in bankruptcy. Property that you cannot protect with bankruptcy exemptions may be taken and liquidated by the bankruptcy trustee for the benefit of unsecured creditors.
Similarly, under chapter 13, there are no property limits. The same rules concerning bankruptcy exemptions exist. If you have nonexempt property, you can expect to pay the dollar value of that nonexempt property in your chapter 13 repayment plan.
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As individual finance geeks, we think customers will be able to make smart cash choices and never having to be fully knowledgeable in finance. This is exactly why we not merely partner with a few for the best-in-the-industry specialists, but additionally advertisers providing many different economic solutions which will gain you. Our lovers may influence just exactly exactly how and where services and products show up on this website, but we confirm their services are aligned with this goal that is main you with a multitude of completely investigated resources and user-friendly tools to simply help make suggestions in your economic choices. Bankruptcy is the best process that is legal enables individuals or companies in monetary difficulty to erase or repay most debts and begin over. It will also help avoid creditors from harassing you, garnishing your wages or foreclosing in your house. But there might be lots of pity and anxiety connected with filing for bankruptcy, and you will worry so it will destroy your credit forever.
Chapter 7 Is Better If
you only have unsecured debt, like credit card debt, medical bills, balances owed after a repossession, personal loans,Â; etc.,Â;
you donât have a regular income or not enough income to cover your living expenses like housing and food,Â;
you canât afford to hire a bankruptcy lawyer to help you with your bankruptcy case,Â;
you donât have any non-dischargeable debts like alimony or child support or youâre current with your payments on these obligation,
youâre not able to commit to a repayment plan for at least the next 3 years.Â;
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Key Similarities And Differences
Lets first acknowledge the slim similarities between debt settlement and bankruptcy: Each is designed to erase or forgive certain types and certain amounts of debt.
Also, at the end of each, your credit score will have absorbed a hammering.
Thats pretty much it. Beyond that, the two processes are remarkably different animals.
Personal bankruptcy falls, generally, into two types: straight liquidation of assets and reorganization . Both go through the court system where a judge, ultimately, decides the outcome. Both also become part of the public record.
Once you have qualified for bankruptcy , creditors must stop hounding you for money.
Thats not the case with debt settlement. During the process usually between 24 and 48 months ;collection calls and mail demands continue, along with late and, possibly, over-limit fees continuing to accrue, with no guarantees theyll reach successful outcomes. For this reason, debt settlement can end in bankruptcy anyway.
Using Your Data To Estimate Costs Pros And Cons With A Chapter 7 Or Chapter 13 Bankruptcy Calculator
Filing bankruptcy can be a huge decision so understanding the costs, pros and cons attached is extremely important. With that being said, you can take our Chapter 7 vs Chapter 13 bankruptcy calculator to directly compare your options based on your specific data.
Some of the most important factors to consider when deciding your debt relief options can be:
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It Could Reduce Your Monthly Debt
When you have a debt discharged through Chapter 7 bankruptcy, youre no longer legally required to pay that debt back. That means the money you were paying toward that loan or credit card, for example, can now be used for other things, like household necessities.
Note that there are a number of exceptions to the debts that can be discharged in Chapter 7, so we recommend contacting a bankruptcy lawyer before you file.
How Much Debt Must You Have To File Chapter 7
As much as we would like to live debt free, most of us dont have the money to pay our bills in full each month. If youre thinking about filing bankruptcy, a question I often get is how much debt must I have to file bankruptcy?
Under any scenario, there is no minimum amount of debt you must have to file bankruptcy, regardless of the chapter. While other circumstances come into play , you can file bankruptcy with just $1,000 in debt, or $100,000 in debt.
Keep in mind, however, that there are no debt limits in chapter 7 bankruptcy. So the amount of debt you have in chapter 7 has no cap. Things are a little different with chapter 13 bankruptcy, since there are limits to the amount of secured and unsecured debt a debtor may have.
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What Is The Bankruptcy Process
Bankruptcy is an option to eliminate or reduce debt if you are unable to pay your creditors.;However, this should only be considered a last resort and used only after exhausted all other options.
Most people who file bankruptcy are filing under Chapter 7 and Chapter 13.;What happens to your property is the most important distinction.
Chapter 7 bankruptcy is also known as liquidation bankruptcy. This means that you must sell a portion or all of your assets to meet your obligations.;This is often the best option if you dont have a house or have a limited budget.
Chapter 13, also known as a Reorganization Bankruptcy, allows you to keep your property as long as you follow a three to five-year court-mandated repayment program.
Depending on your marital status and where you live, you may be able to exclude some of your property from being auctioned.;The exemption amounts are taken from your home equity, retirement funds or personal items, and the rest of the profits can be used to pay debts.;This graphic will provide a quick overview of both the types and details about exemptions.
Who is authorized;to file?
- Both individuals and businesses can be included in this category.
- Chapter 7 means the test requires that disposable income be sufficiently low to pass.
What is the time it takes for a discharge?
- It is common for three to five months.
What happens to a persons property if they file for bankruptcy?
Chapter 7 Is Faster But Is It Better
A Chapter 7 discharge is simply much faster to obtain.
There are other more subtle reasons that Chapter 7 is better, as well. For instance, one may only obtain a discharge of debt in Chapter 7 every eight years .
New creditors know this about debtors coming out of Chapter 7. They also know that the amount of debt owed is now $0 or at least substantially reduced, and they know debtors are minimum payment acclimated, meaning, debtors know how to make minimum payments on outstanding balances.
However, Chapter 13 also looks good to some debtors. Its particularly helpful when dealing with foreclosure, as well as mortgage modifications, car payments, and IRS problems. But the biggest problem with Chapter 13 is just how long it takes, and that all disposable income must go toward your payment plan for that set amount of time. With Chapter 7, youll pay less for your debts but you also have to qualify for Chapter 7 in the first place.
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Will I Lose Property In Chapter 7 Bankruptcy
Your state decides whether you can use the federal bankruptcy exemptions or state exemption laws. Although exemption laws differ, you’ll typically be able to keep these types of property in bankruptcy:
- Home equity. A “homestead” exemption protects home equity. You can exempt up to $25,150 under the federal exemptions. Most states allow debtors to protect some home equity, although a few states don’t have a homestead exemption. Find out more about your home in Chapter 7 bankruptcy.
- Insurance. You usually get to keep the cash value of your policies.
- Retirement plans. ERISA-qualified plans receive protection in bankruptcy. Find out more about your retirement plan.
- Personal property. You’ll be able to keep a modest car and most household goods, furniture, furnishings, clothing, appliances, books, and musical instruments. Luxury items aren’t protected, and jewelry may be limited to $1,000 or so. Most states let you keep a vehicle as long as your equity doesn’t exceed several thousand dollars. Many states have a “wildcard” exemption you can apply toward any property. Learn more about what happens to your automobile in your car in Chapter 7 bankruptcy.
- Public benefits. Welfare, Social Security benefits, stimulus payments, unemployment insurance and the like are protected.
- Tools used on the job. Most states allow filers to keep up to a few thousand dollars worth of the tools used in a trade or profession.
Pros Of Debt Settlement
There definitely are some things to like about debt settlement, such as:
- If youre organized and persistent, you can attempt debt settlement on your own. Talk to your creditors; explain your situation; attempt to work out terms. The fees you save can be substantial.
- If, instead, you require representation and all goes well, you can be clear of your unsecured debt in 24 to 48 months, at a fraction of what you owed somewhere between 25%-50%.
- You wont owe an add-on fee as each debt is settled; thats already worked into your escrow account deposits.
- States regulate the debt settlement industry. Know your states laws regarding upfront disclosure of fees and services, as well as the risks and benefits.
- Harsh as it is, debt settlement can mean avoiding bankruptcy, which means, among other things, your plunge into fiscal calamity will not become public record.
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Chapter 7 Vs Chapter 13: Which Bankruptcy Is Better For You
If youre struggling with debt, bankruptcy protection may be a great option for you. Even if you do just basic research, youll probably quickly be pointed to chapter 7 vs chapter 13 bankruptcy. Chapter 7 and Chapter 13 are two common but different types of bankruptcy that many individuals use for personal bankruptcy. When it comes to chapter 7 vs chapter 13, one of the most fundamental differences between these two chapters is that Chapter 13 is based on a repayment plan, while Chapter 7 liquidates your property and possessions to pay your debts.
If youve been thinking about filing bankruptcy, then youve probably come across the different forms of consumer bankruptcy. The more popular chapters under which personal bankruptcy gets filed are chapter 7 , chapter 13 , and chapter 11 . Before we get to the differences between chapter 7 vs chapter 13, there are some similarities across bankruptcy.
First, any consumer bankruptcy case gets started by filing a bankruptcy petition in the appropriate court. Similarly, you must pay a filing fee for any type of bankruptcy case.
Next, in all personal bankruptcy cases, the debtor will have to complete a credit counseling course and a debtor education financial management course.