While bankruptcy is truly a last resort, it can also be the light at the end of the tunnel that provides a path out of crippling debt. The effects of bankruptcy are harsh, but they can often be preferable to the overwhelming financial and psychological toll of long-term debt. Unfortunately, filing for bankruptcy is not necessary a simple process. One of the first steps is simply deciding whether to file for Chapter 13 or Chapter 7 bankruptcy, each of which has its own advantages, potential pitfalls, and path to recovery.
Liquidation vs. Reorganization
The first and most important difference between Chapter 7 and Chapter 13 bankruptcy is how your assets will be treated. Under a Chapter 7 bankruptcy, your assets will be liquidated in order to pay your debts. If you have significant property, you can expect that property to be sold off and the proceeds to ultimately go to your creditors. All states do have certain exemptions, however, which will allow you to keep certain types of property or the proceeds from selling the property if the value exceeds the exemption limit.
Under Chapter 13 bankruptcy, however, your property will not be liquidated. Instead, nonexempt property can potentially increase the total amount you will pay on your Chapter 13 repayment plan. While this does allow you to keep your property, it can potentially make the payment plan unaffordable or even make filing Chapter 13 an unrealistic option for your particular case. In some cases, it may make sense to sell off nonexempt property yourself before filing for Chapter 13. Always consult with a lawyer before selling off property in anticipation of a bankruptcy filing, as there are potential legal pitfalls if it appears that you are attempting to defraud your creditors.
Note that filing a Chapter 13 bankruptcy will allow you to receive a stay on any secured loans that credits are trying to collect on. This means that you can keep your house or your car as long as you are able to make payments on them while paying on your bankruptcy plan.
Chapter 7 and Chapter 13 bankruptcy differ in who can qualify for them as well. Chapter 7 bankruptcy requires that you undergo a means test to prove that your income falls below a certain threshold and that your debts represent a significant hardship. If you do not meet these requirements then you will not be permitted to file under Chapter 7.
Filing a Chapter 13 bankruptcy, on the other hand, requires that you be employed and have sufficient income to cover your repayment plan. Because nonexempt assets can potentially increase the amount that you will have to pay as part of your plan, it is possible that holding large numbers of nonexempt assets will disqualify you from a Chapter 13 filing.
Time to Complete and Refile
Chapter 7 bankruptcies tend to be completed in fairly short order, usually within a few months. During a Chapter 7 bankruptcy, your assets will be liquidated, the proceeds will be given to credits, and your remaining debt will be discharged. This process gets you out of debt quickly, but it remains on your credit report for ten years and you will not be able to file for Chapter 7 bankruptcy again for at least eight years.
Chapter 13 bankruptcy is a much longer process, and your repayment plan will be several years long. Chapter 13 bankruptcies are usually removed from your credit report more quickly than Chapter 7 bankruptcies, however, and you may refile your bankruptcy sooner if new hardships arise. Contact a legal firm, like Phoenix Law, for more help.Share