Friday, 8 January 2021

Chapter 7 Or Chapter 13 Bankruptcy _ Which is Better


In this article, I'm going to talk about the differences between Chapter 7 and Chapter 13 bankruptcy. I'm going to tell you which one is going to be better for your situation and just really what to expect from the process. 


Most people have done some initial research into the different chapters and what they can do, what they can't do. And a lot of people will say, well, which one is better? Now, a lot of that will depend on what you're trying to accomplish with your bankruptcy. But in general, Chapter 7 is way better. I can have this be a really short article. Chapter 7 for most people is what they're really looking for. When they think of bankruptcy, they're thinking, hey, I've got too much debt, I can't deal with this, I'm getting garnished. I just have all these credit cards or medical bills, or whatever it is, and they want to get rid of it. 


Chapter 7 is really great at getting rid of credit card debt, medical bills, unsecured debts that don't have any collateral attached to them. They're discharged. They just go away. They're done. You're not legally responsible for them. And so, if what you're facing is credit card debt, if it's medical bills, if it's those types of debts are the biggest problem, Chapter 7 is always where I look first. I hear sometimes attorneys saying, oh, you should do Chapter 13. It's got so many more tools. There's so much more of this and that. It's just really long is what it is. 




The Length Of Time Of How Long These Cases Last

Chapter 7 bankruptcy cases usually last between 4 to 5 months, as far as having an active case with the court. You file your case, the initial petition with the court, and then you get your discharge. The discharge order is the order from the judge that says you're no longer legally obligated on those debts.


In the Chapter 13 case, it's going to be 3 to 5 years, and in most cases five years, before you receive that discharge order. So it's a much longer process. The problem with that is that a lot happens in five years. I mean, think of five years ago of everything that's happened since then. That's how long you're going to be in this Chapter 13 case. 




Why Do People File A Chapter 13?

So you may be asking yourself, okay, Chapter 7 is good for getting rid of credit card debt. I have credit card debt. I want it gone. You may be thinking to yourself, I want it done quickly. I don't want to be devoting the next five years of my life to this process. Why in the world would anybody file a Chapter 13? The main reason that people file Chapter 13, there are three reasons.  



1. They Don't Qualify For A Chapter 7 Bankruptcy


Back in 2005, they revamped the bankruptcy code and they instituted what's called "the means test". And so now, in order to be able to qualify to file a Chapter 7, they're going to look at how many people live in your home, how much income your family receives each month, and then they're going to compare that to these tables that they have, which have the average income for a household of your size. And so, if you make more than that, then you're usually not going to qualify for a Chapter 7 bankruptcy. 


There are some deductions that you can make, which attorneys do, that can help you to qualify even if your income is too high, but in general, if your income, particularly if it's significantly over that, you're not going to be in a situation where you're going to be able to file a Chapter 7 bankruptcy. So the first reason is you make too much money. If you make too much money, your only option may be a Chapter 13, and then you're going to be in there for a three- to five-year period, and you're required to pay back a portion of your debts during that time period. That's one of the other little differences in Chapter 13. 




2. Chapter 13 Does Have More Tools Than Your Typical Chapter 7 Case


The other reason that people file Chapter 13's, even if they qualify for it, is because Chapter 13 does have a lot more tools in it than your typical Chapter 7 case. And particularly if you're dealing with something like home foreclosure, or if your car's going to get repossessed, Chapter 13 has some awesome tools in there, that will allow you to be able to get caught up and stay in your home. 


So for instance, let's say you're behind on your house payment for 4 months, and the bank is saying they're going to foreclose soon. You can file a Chapter 13 bankruptcy. That'll stop the foreclosure from going forward. And then, you have to propose a plan to your mortgage lender of how you're going to get those payments caught up over the next five years. So you have a long time to get 'em caught up. You have to start making the payment as it comes due each month. But basically, it gives you a lot of time to be able to put the foreclosure on hold, get going on the monthly payments and then have quite a while to get the rest of it caught up. 


So, those are usually the two typical situations where we see people file a Chapter 13 is that they make too much money, so they don't qualify for a Chapter 7, or if there is some type of secured debt, home loan, car loan, something like that, that they're trying to bring current. 



3. In Chapter 7, You're At Risk Of Losing Stuff


If you file Chapter 7, it's going to wipe out all that credit card debt. But if you have any assets that you own that are not protected by one of the exemption laws in your state, the court could seize the asset, sell it and give the money to your creditors. Most states have exemptions that protect the basics, like the homestead exemption to protect your home, exemptions for your cars, 401ks, IRAs, your household goods, those types of things. In most states, those are protected and they are exempt, so the court can't take 'em. 


But let's say you have a boat, you have a brand new boat that you just bought. It's all paid for. You file Chapter 7 bankruptcy. At least in Arizona, chances are super high they're going to go in, take that boat, sell it, and give the money to your creditors. 


Chapter 13, on the other hand, they're not going to take the asset. Having the asset will increase the amount you have to pay your creditors over five years, but you can keep the boat, still work your way through the five-year process paying off some of the debt along the way, but you can keep the boat through the process.






Conclusion

I would look at Chapter 7. Chapter 7 is fairly quick. It can be fairly painless and it allows you to move on. And not only that, you recover from it more quickly. Chapter 7 will stay on your credit for 10 years. But most lenders, like if you're trying to get into a home, like FHA, they will loan to people who are two years outside of their Chapter 7 bankruptcy. Other lenders are three to four years. So, you can recover more quickly, as opposed to a Chapter 13 where you're in an active bankruptcy for five years, and that can limit the possibilities as far as getting credit extended to you just for the reason you have an active case. Chapter 7 is almost always better.

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