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How to Choose Between Chapter 13 or Chapter 7
Bankruptcy Chapter 7 Vs Chapter 13 – Which bankruptcy is right for you? When you decide to file bankruptcy has a lot to do with what is going on in your life. Some people have medical bills from a surgery they cannot pay for. Another person may have lost their job and can’t make ends meet. There are numerous reasons why anyone may need to file a bankruptcy.
In this post, you will find out if Chapter 7 or Chapter 13 is the right option for you. While we can share information behind both chapters, talking to a competent bankruptcy attorney in Towson is a smart move.
The General Idea Behind Bankruptcy
Bankruptcy is a legal procedure that protects persons and companies from creditors. Bankruptcy may help people with debt troubles have a new financial start.
Bankruptcy relieves certain elderly of their legal responsibility to pay debts. Others may catch up on mortgages and vehicle loans or pay off bills at a reduced rate.
Filing for bankruptcy also precludes most creditors from collecting debts until the bankruptcy procedure is completed.
Features of American Bankruptcy
In the US, the primary chapters are 7, 11, and 13. A bankruptcy case starts an estate. All debtor’s property interests as of the case’s commencement are included in the estate.
The Bankruptcy Court has jurisdiction over bankruptcy cases, but each district court may “refer” cases to the bankruptcy court. The Bankruptcy Court hears all bankruptcy matters under most district court “reference” orders.
The Attorney General appoints trustees for each of the US’s 21 regions. These trustees oversee a panel of private Chapter 7 trustees. A US trustee may also be heard on any issue in a bankruptcy case except filing a Chapter 11 plan.
Chapter 13 vs. Chapter 7
The critical distinction between Chapter 7 and Chapter 13 is that Chapter 7 is intended to avoid unsecured debt such as credit cards, personal loans, and medical bills, whereas Chapter 13 allows you to catch up on secured obligations such as your house or vehicle while also eliminating unsecured debt.
Chapter 7 investigates your financial situation at the time your complaint is filed, safeguards those that are “exempt” – in most cases, everything you possess — and dismisses the majority, if not all, of your obligations.
Chapter 13 examines your financial situation as of the day your case is filed but focuses more on establishing a repayment plan for any secured debt (home, vehicle, etc.) that you are behind on while also eliminating the majority, if not all, of your unsecured obligations.
Advantages of Using Chapter 7 Bankruptcy
Chapter 7 bankruptcy is the most often filed kind of bankruptcy. It’s a painless way to get rid of most of your debt. Not having to pay it back later lets you start restoring your credit right now. Chapter 7 is suitable for unsecured debtors.
For example, suppose you have a lot of credit card debt or hefty medical bills that you can’t pay, Chapter 7 may help you start over.
Chapter 7 Bankruptcy Drawbacks
Chapter 7 is terrible with secured debt. Chapter 7 won’t help you if your debt is primarily mortgage, vehicle loans, or other debt. Also, not all unsecured debt can be discharged under Chapter 7.
Chapter 7 also includes a means test. The means test<span style=”font-weight: 400;”> inhibits people who can afford to pay their creditors from doing so. A single family’s income must be below the state median or have inadequate cash left over to cover basic costs.
The obligation is only discharged when you have taken control of the property. An individual who has mortgage arrears cannot just file Chapter 7 and maintain their house.
You might use cash from other loan repayments to pay off your mortgage faster. If you are compelled to sell your house, you might be freed from your contract and pay off the remaining dues.
Destroying your credit for ten years is another huge downside of Chapter 7. It’s worth remembering while you consider your choices.
Chapter 13 Bankruptcy Disadvantages
If you’re considering Chapter 13 bankruptcy, there are several drawbacks to consider. To settle debts under Chapter 13 requires up to five years and must be paid from disposable income.
After paying for needs like food, housing, and medical care, your disposable income is what’s left after that. That is, your surplus funds will be locked up for the duration of the repayment schedule.
Your credit may be harmed by a bankruptcy filing for some time. It may damage your credit for ten years and cause you to lose all of your credit cards. For those who don’t already have one, bankruptcy makes getting one difficult.
Also, if you decided to file for Chapter 13 bankruptcy within the previous six years, you will be unable to apply for Chapter 7 bankruptcy.
Keep in mind that you cannot apply for Chapter 13 bankruptcy if you have had a previous Chapter 7 or Chapter 13 case dismissed within the last 180 days for the following reasons:
- You violate a court order, or
- You sought dismissal in response to a creditor’s request for relief from the automatic stay.
Notably, if you got a Chapter 13 discharge in good faith after paying at least 70% of your unsecured obligations, the 6-year prohibition from filing for Chapter 7 bankruptcy does not apply.
No student loan debt or alimony, or child support obligations are exempt from the Chapter 13 bankruptcy repayment plan. Even if you declare bankruptcy, you may still be forced to pay specific bills like a mortgage lien.
Choosing Chapter 13 Bankruptcy Has Its Perks
Some benefits outweigh the disadvantages of Chapter 13. Chapter 13 trustees may be more liberal with payment arrangements than in Chapter 7. You may be able to:
- extend your loan repayments,
- pay less, or
- abandon a loaned piece of property
Individual creditors cannot compel you to make full payment until you finish a repayment plan under Chapter 13.
A Chapter 13 bankruptcy is also a short-term solution to problems like missed payments, defaults, repossessions, and litigation that may wreak havoc on your credit and be challenging to explain to a prospective lender.
Bankruptcy may help you recover your credit faster. The one catch is that you may only file for Chapter 7 once every six years. This means you may file Chapter 13 many times.
Do the Right Thing- Speak to one of the Grafton Firm’s lawyers.
Bankruptcy is a very personal matter. The above list should have prepared you to make the best decision for your specific circumstances. One critical point to remember is that Chapter 13 can be a far more effective process for saving your house or another asset, even if you are correctly insolvent, whereas Chapter 7 can cost you money if your income is too high.
As such, it is vital that you first speak to a qualified bankruptcy lawyer in Towson who can provide you with an impartial opinion on your case. The attorneys of the Grafton Firm would be more than happy to talk with you about your situation, see your eligibility for any of the bankruptcy protections, and answer any of your questions to help you make an accurate choice on how to proceed. Book a free consultation with us online or call (410) 505-0414.