Chapter 7 vs. 13 Bankruptcy
If you’re drowning in a sea of financial debt and can’t be approved for a debt consolidation loan, bankruptcy may be the right solution, albeit a last-resort option. Millions of Americans are in the same situation whether it be from a sudden medical expense, a costly divorce, bad business dealings, death of a spouse who contributed income, or poor money management.
People find themselves in financial desperation for every reason imaginable.
Read our list of what you need to file bankruptcy.
Chapter 7 bankruptcy is the most common. It’s important to know that if you go this route, it will be listed in the public records section of you credit report for 10 years. Therefore, if you erased your balance sheet with this form of bankruptcy protection, it still has a couple of years left on your credit reports.
Chapter 7 Bankruptcy is entitled “Liquidation”.
Of the two types of bankruptcy, Chapter 13 is the lesser version. It will stay on a credit report for seven years and the clock starts the date of you file it. If you used this type of bankruptcy, which is a court-administered repayment plan.
Both Chapter 7 and Chapter 13 bankruptcy are serious financial actions and have consequences. Therefore, entering into a legal agreement such as this shouldn’t be taken lightly. If you were to ask any responsible financial adviser, debt consolidation counselor, or bankruptcy attorney, all will tell you to consider other means of getting out of debt prior to bankruptcy. However, if all other options have been exhausted, this government program will help get you back on the right track.
Nearly 75% of consumers choose to file Chapter 7 vs. 13 bankruptcy.
Filing Chapter 7 Bankruptcy
Chapter 7 bankruptcy is the most common type, which involves assets being liquidated, meaning you could keep only exempt property such as a home, car, clothing, etc, with everything else being sold and any proceeds used to pay off creditor debt. For debt deemed “discharged”, the money owed would be discharged or forgiven. To get started, an attorney would file a petition with the court, listing all your assets, as well as creditors and outstanding debt for each.
In this case, most debt is exempt, consisting of assets you would keep. For nonexempt debt, you would make scheduled payments to the creditors until paid in full. You would have a court-assigned trustee, someone to walk with you through the process and ensure everything lines up with the new bankruptcy laws.
If you have no income, no debt cosigners, and have one or more creditors who are going to take legal action against you, then filing Chapter 7 bankruptcy may be your only option.
Filing Chapter 13 Bankruptcy
A Chapter 13 bankruptcy is more a reorganization of financial than a liquidation of assets. Only 25% of people choose this type of proceeding, usually people who want to pay off debt but need a schedule of three to six years to do it. If you only have nonexempt property that you want to keep, this would be the best option.
Remember that you can negotiate the debt amount. Depending on your income, you can negotiate 10-100% of the total amount owed.
Specific qualification criteria are set for a Chapter 13 bankruptcy and since debt levels are usually high, this option is often used by business owners with repayment going to secured creditors first. Usually, a Chapter 13 bankruptcy is used for people who are behind on mortgage payments, owe tax money to the IRS, want to protect assets that would otherwise be liquidated under Chapter 7, and/or receiving debt collector calls day and night.
Chapter 13 Bankruptcy is entitled “Adjustment of Debts of an Individual With Regular Income”.
Bankruptcy protection can prove beneficial in many ways, but there is obviously huge downside to consider.
- Your credit is going to be negatively affected for up to 10 years.
- You will be required to pay various fees to file for bankruptcy protection. There may also be attorney costs or consultant fees.
- Chapter 7 Bankruptcy may be a red flag when applying for a new job. If your credit report shows that you filed bankruptcy it might be tough to land a job in the insurance, mortgage, finance or accounting industry.
- Landlords may be hesitant to rent to you since you have a history of default. In many cases you may need a cosigner.
Chapter 7 vs. 13 Bankruptcy FAQ
An estimated one million bankruptcy cases are filed every year, and it’s gotten worse due to the Coronavirus pandemic.
Taken together these cases add up to billions of dollars in consumer debt. Below we look at some of the frequently asked questions (FAQs) surrounding bankruptcy.
What is Bankruptcy ?
Bankruptcy is the legal process that is in place to protect an individual or a business if they find themselves in financial trouble and are unable to pay the debts they owe to creditors. The legal process is there to make sure that all parties involved are treated fairly. This includes the creditors as well.
There are different chapters of the federal bankruptcy law. However two of the most common are known as Chapter 7 bankruptcy (also sometimes called “straight bankruptcy”) and Chapter 13 bankruptcy (also known as “wage earner’s bankruptcy” or “reorganization bankruptcy”).
Will my creditors stop calling me once I file bankruptcy?
Yes, by law they must cease hassling you for payment once you have filed the appropriate papers. No lawsuits, wage garnishees or telephone calls can begin or continue once the bankruptcy process has commenced.
Will I have to go to court?
A debtor filing for Chapter 7 bankruptcy is unlikely to have to appear in court and won’t have to see a bankruptcy judge unless an objection is raised.
A Chapter 13 debtor may only have to appear before a bankruptcy judge for a planned confirmation hearing. This is usually the only formal procedure in which the debtor must meet with their creditors. This hearing is referred to as a “341 meeting” because section 341 of the U.S. Bankruptcy Code requires the debtor to appear so that creditors can ask about their debts and assets.
Who will know about my bankruptcy ?
Chapter 7 bankruptcies are a matter of public record. However unless someone runs a background check or credit report no one will know (unless you choose to tell them). Be aware however that the record of your bankruptcy can stay on your credit report for up to 10 years. You can request a copy of your credit report after that time to verify for your own peace of mind that the bankruptcy is no longer on your record.
What am I not allowed to keep when I file for bankruptcy ?
When you file for bankruptcy you’re allowed a certain amount of latitude. In other words, there are personal exemptions that must not go over a specific limit. However assets that exceed that limit and/or non-exempt assets such as cars, boats and real estate, etc. will be liquidated by the trustee assigned to your case.
If I was bankrupt in the past can I file again in the future ?
Hopefully you won’t find yourself in terrible debt again, but if you do then be aware that you are permitted to file for Chapter 7 bankruptcy if eight years or more has gone by since you filed for it the first time.
Am I allowed to keep my credit cards when I file bankruptcy ?
This is up to the discretion of the credit card company that you owe money to. If you are discharging a credit card in the bankruptcy then they will cancel it, unless you are reaffirm the debt owed to them. Even if your credit card balance is at zero and has been paid in full the provider may cancel your card with them anyway.
When will I receive my discharge from bankruptcy?
One of the main goals of the legislation that surrounds bankruptcy is to provide the debtor with an opportunity to erase their financial debt and start new. The total amount owed is erased once the debtor has been discharged.
In most cases a bankruptcy discharge occurs after four months from the date it was filed on. This is provided that the individual fulfills all of his or her necessary requirements of the bankruptcy proceedings. With some exceptions, debts are written off upon discharge.
Will I be able to get credit again after filing bankruptcy?
Regaining your personal credit will take some time, but you’ll eventually get there. You may not get approved for an unsecured credit card right away. However there are some lenders that offer pre-paid or secured credit cards for people who have had financial problems (such as bankruptcy) or bad credit rating. In this case you pre-pay the amount you want to spend and that is your credit card limit.
When can I get approved for an unsecured loan again?
It’s hard to say, but two years after bankruptcy discharge you should be able to apply and get approved for an unsecured credit cards with a low spending limit (usually $200-500). As long as you have a steady income and continue to pay your bills on time, it shows good favor with potential lenders.
When can I get approved for a home mortgage?
For a mortgage the size of the down payment and how stable your income is will hold more weight than the bankruptcy filing. The more time that passes the less significant your bankruptcy is considered to prospective creditors.