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Chapter 7 Bankruptcy Basics vs. Chapter 13 Bankruptcy Basics
What’s the difference and which one is best for me?
Chapter 7 Bankruptcy Basics
A Chapter 7 filing is that chapter of the bankruptcy code that allows certain debtors to discharge (eliminate their personal liability for) their unsecured, dischargeable debts. You can typically elect to keep and continue to pay the secured debts you wish to retain, such as homes and vehicles, or you can elect to surrender the collateral in order to get out from under the debt. It is your choice and you do get to pick and choose. Certain debts; however, are not dischargeable such as newer taxes, child support, alimony and student loans. Furthermore, in order to qualify for a Chapter 7 filing there are income limitations based on where you live and household size. This “means test” is an objective analysis based on the last 6 months of gross income. We perform this “means test” for you at the free initial consultation assuming you have provided all the requested information.
Chapter 13 Bankruptcy Basics
A Chapter 13 filing, or “plan of reorganization”, is that chapter of the bankruptcy code that allows you to reorganize your debts into an affordable monthly payment payable to a Trustee who then pays your creditors. And just like a Chapter 7, most debtors still receive a discharge of some, if not all, of their dischargeable debts. Typically, your payment will be based on your ability to pay; however, it is important to speak with an experienced attorney who is skilled at the nuances of Chapter 13 laws as well as finance & plan preparation.
Why would someone choose to file Chapter 13?
There are several reasons why individuals choose a Chapter 13 over a Chapter 7. Here are some of the more common examples;
- To save a home and/or a vehicle – if you have fallen behind on your mortgage and/or vehicles, a Chapter 13 will stop the threat of foreclosure and repossession. It will stop the creditor harassment and late charges/fees and, more importantly, it will allow you a 3-5 year period with which to get caught up on the arrearages or completely restructure the loan payoff! Either way, it provides immediate relief along with an affordable way to keep your property.
- To pay priority debts – remember that not all debts are dischargeable in bankruptcy, so if you have back tax issues and/or you’re behind on your child support/alimony, a Chapter 13 can structure an affordable payback of these debts while at the same time addressing all of your other debts as well. Again, it provides immediate relief from prosecution and an affordable way to be debt free in a maximum of 3-5 years.
- Costs– Chapter 7 fees must be paid in advance prior to filing and some clients simply don’t have the means to do so or they need protection before they can accumulate the needed funds to file. As a client of Southeast Bankruptcy, so long as you have a good paying steady job, our office routinely files Chapter 13 cases with no attorney fees up-front. Chapter 13 attorney fees are set by the court so most all attorneys charge the same; however, we allow you to pay us through the Trustee payments
- Additional Benefits available in a Chapter 13 –. Very common example that we see daily… Client is struggling to pay all their minimum payments and wants to keep a financed car (their only asset) which they pay directly every month at, let’s say, $600.00 per month. Many times, a Chapter 13 can be structured to pay off the vehicle in full along with the fees to file bankruptcy resulting in a monthly payment of only $450/month. A monthly savings of $150! Because a Chapter 13 allows us to reduce the interest rate on the vehicle, spread out the balance of payment and, more importantly, Cram-down (discussed next below) we can actually reduce a clients monthly expenditures, discharge all their debt just as if they had filed a Chapter 7 and we can do so with no attorney fees up-front so they can get the protections and benefits of bankruptcy now!
- Cram-downs and Lien Strips – a Chapter 13 may allow certain debtors to keep their vehicles and pay only its current fair market value. It is not uncommon for our clients to owe $20k on a vehicle that is only worth $10k. If certain conditions are met, we can propose to pay only the $10k allowing you to keep and fully payoff your vehicle. This is known as a cram-down. This same concept applies to mobile homes and other purchase money security interests. Another valuable tool in a Chapter 13 is a lien strip. If your home is currently worth less than you owe on your first mortgage and you also have other subordinate liens such as second mortgages and line’s of credit (HELOCS), we may able to treat those second mortgages as unsecured creditors thereby discharging the debt and removing the lien in the public records!
- Not eligible for a Chapter 7 – it could be that you don’t have a choice but to file a Chapter 13 because you make too much money or it has not been 8 years since your last Chapter 7 filing, so you will have to propose to pay what you can every month in one consolidated payment. REMEMBER: the good news here is as long as its been 4 years since your previous Chapter 7 filing you are STILL ELIGIBLE FOR A DISCHARGE OF YOUR UNSECURED DEBT!
So Which Chapter is best for me?
There is rarely a cut and dry answer to this question. If you have no assets, all dischargeable, unsecured debts and the money to file a Chapter 7, then that is typically the route to go. However, you could be falling behind on your house, car and taxes and need time to get caught up, in that case a Chapter 13 is right for you. And as discussed above, there may be more than one reason to file a Chapter 13 over a 7. It truly depends on your individual situation, all your assets and debts, monthly income and personal goals. After meeting with us at the free consultation you will typically leave with a good understanding of all your options to choose between as “most” of our clients have several options.
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