Bankruptcy Pros And Cons: Chapter 7 And Chapter 13

Most people now are experiencing financial hardship. Declaring bankruptcy is one of the most valuable protections Americans have. Bankruptcy protection can help you rise after drowning in debt. The following article gives you the pros and cons of the two common types of bankruptcy. 

If you need more information in filing for bankruptcy, a bankruptcy attorney from Grafton Firm, LLC. can assist. Contact our bankruptcy lawyers today at (410) 505-0414.

Chapter Thirteen 

Chapter 13 bankruptcy is also known as a reorganization bankruptcy. When you declare bankruptcy under Chapter 13, the court administers a debt repayment plan. Any remaining debt after you pay off your plan will be discharged. Your creditors can’t file an involuntary Chapter 13 case.

Pros

Get rid of unsecured debt

These include credit card debt, medical bills, old utility bills, old rent payments, and personal loans. You may be able to get rid of these under Chapter 13 by paying just a small amount of debt through the repayment plan. 

Save your home from foreclosure

With the help of bankruptcy courts, you can keep your home by filing a Chapter 13 plan. This allows you to catch up on past due mortgage payments over several years.

Help with tax debt

While income tax debt is usually not dischargeable in a bankruptcy case, you can spread out your payment over 3-5 years. If some of your income tax debt meets certain requirements, you might be able to get rid of tax debt for less than you owe the government.

Help with the second mortgage

If your home is worth less than what you owed on the first mortgage, you can file a motion to value the second mortgage as zero. If approved, the balance of the second mortgage becomes unsecured debt and is completely wiped out after your case. 

Help with car payments

Chapter 13 can help you avoid repossession. If you owe more than what your car is worth and have owned it for at least 910 days before bankruptcy filings, you might be able to lower your car payments. If not, you can at least stretch payments, which can lower it to an affordable amount. 

Help with domestic support payments

You can add domestic support obligations, alimony, and child support to your Chapter 13 plan. Once you reorganize your payments, you can avoid jail time and other court cases. 

Cons

Negative credit impact

You could lose an estimate of 100-200 points. However, it’s only on your record for 7 years compared to 10 years after bankruptcy under Chapter 7. 

Low payment flexibility

You are required to use all disposable income to repay your debt. If your income increases, your payment plan may also increase. Furthermore, you can’t incur debt at the time of the case without the bankruptcy court’s approval. 

Length of time

A case often lasts 3-5 years before it’s paid in full. Thus, some might opt to negotiate a debt settlement, debt consolidation, or other forms of debt relief as an alternative to bankruptcy.

Chapter Seven 

Chapter 7 bankruptcy is also known as straight or liquidation bankruptcy. In this case, you turn over any non-exempt property to a trustee, who then sells it for the benefit of creditors. Exempt property is necessary for someone to get a fresh start. When you file for bankruptcy through Chapter 7, the court places an automatic stay on your current debts which stops creditors from collecting. 

Pros

Relatively speedy discharge

A no-asset case can be completed within 4-6 months after filing the petition, meaning any unsecured debts may be eliminated in under 180 days.

No deficiencies

A deficiency is a money you owe even after losing property from foreclosure or repossession. Chapter 7 eliminates deficiency judgments. If you surrender collateral, the creditor can’t try to collect if the sale of your property doesn’t pay the amount in full. 

Stop debt collection lawsuits

If a creditor sues, filing bankruptcy under Chapter 7 stops the lawsuit. If what the debtor owes is dischargeable, the lawsuit can’t continue and the debtor can get rid of the debt. This bankruptcy chapter also gets rid of judgments if the debts incurred are dischargeable. 

Cons

Income Requirements

Your income must be below the median income in the state to qualify for Chapter 7. This is calculated with the bankruptcy means test. 

Potentially lose property

Property not protected by bankruptcy exemptions may be sold by the bankruptcy trustee to pay the debtor’s unsecured creditors. 

Negative credit impact

Your credit report will show in public record of bankruptcy for 10 years and your credit score will be negatively affected. 

Non-dischargeable debt

Some debts are not eligible for bankruptcy discharge. These include taxes, student loan debt, alimony, child support, restitution, some judgements, and most government debt. 

If you need help with how to file for bankruptcy, a bankruptcy lawyer from Grafton Firm, LLC can assist. Contact us here or call (410) 505-0414 today for a free consultation.