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Chapter 7 vs Chapter 13: An introspective comparison
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Filing for bankruptcy is one of the toughest fiscal decisions to make for any individual and once decided, which option to choose is another confusing job. If you are going to file for personal bankruptcy, you have options like Chapter 7 and Chapter 13 bankruptcy. However, in order to choose the right option for your specific condition, you should have a thorough understanding of the ins and outs of each option. Sometimes, even guidance of an experienced bankruptcy attorney may be necessary to get going with the best option. Below given is a careful comparison of both of the options. Read on and choose the most suitable one for you.

 
Chapter 7: Straight liquidation bankruptcy Chapter 13: Court approved payment plan

Usually opt when:

  • The debtor is trying to shed all unsecured debts and looking for a fresh financial start.
  • The debtor can no longer repay the unsecured debts and has few assets left for basic necessities.
  • Or

  • The debtor would have no money left after paying for the basic expenses.
  • The debtor brings home some savings after paying for the basic necessities and can pay off the debt with a reduced payment plan.
  • The debtor has significant equity in a home and wants to keep it.

Advantages

  • Most unsecured debts may get discharged (complete elimination).
  • It takes around four to six months for the complete discharge procedure.
  • You get complete respite from collection attempts until the ‘automatic stay’ is in effect.
  • The debtor keeps both exempt and nonexempt properties.
  • Chapter 13 bankruptcy helps a debtor avoid foreclosure and wage garnishment.
  • It allows individuals to reschedule secured debts (other than a mortgage for their primary residence) and extends them over the life of the Chapter 13 plan.
  • Filing Chapter 13 protects co-signers who are also liable for the debt.

Who can file?

Individuals who have qualified under the ‘means test’, earn less than the state determined median income, and have completed the mandatory credit counseling and budget analysis are eligible to file for Chapter 7 bankruptcy. Anyone:
  • Who has sufficient monthly disposable income;
  • Whose unsecured debts are within $336,900; and
  • Whose secured debts don’t exceed $1,010,650.

Frequency

If you already filed Chapter 7 bankruptcy in past, you’ve to wait for another 8 years to file again. Your plea for Chapter 13 discharge won’t be granted if you already received a discharge in Chapter 7,11, or 12 four years before or more or in Chapter 13 two years before.

Effect

On debt:Apart from few exceptions (e.g., federal student loans, child support, alimony), most debts are discharged upon successful completion of the bankruptcy procedure.

 

On home:In any circumstance, you must keep up with your mortgage payments if you want to preserve your home. If you stay updated on your payments, your home may be preserved under homestead exemption. However, as per new law, up to $125,000 homestead exemption is allowed if home acquired 40 months before filing or if debtor engaged in certain fraudulent conduct.

 

On nonexempt assets: All nonexempt assets must be surrendered for liquidation and thereafter, distribution.

On debt:All or a portion of the debts (except tax debts, or debt due to Breach of Contract or Negligence) may be discharged and the rest has to be paid off as per the court approved payment plan.

 

On home:Home will be preserved if Chapter 13 plan is properly carried out and if there is no substantial nonexempt equity.

 

On nonexempt assets: There won’t be any problem if the court approved repayment plan is successfully carried out. If not, the debtor’s nonexempt assets are sold to pay creditors, just like in Chapter 7 bankruptcy.

Payments

Most debts are discharged in Chapter 7 bankruptcy except federal student loans, taxes, child support and alimony.1 The disposable income of the debtor is available for payment. However, what is reasonable to pay each month is completely determined by the court.

Effect on credit

Chapter 7 bankruptcy filing induce an initial negative impact on your credit score and stay there in your credit file for up to ten years from the date of filing. Record of filing Chapter 13 bankruptcy would stay there in your credit report for up to 7 years from the date of filing. However, after the time-span is over, all negative items must be removed from your credit report.


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