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Choosing Chapter 13 vs. Chapter 7
By Credit Watcher | October 5, 2008
Chapter 13 bankruptcy, sometimes called reorganization bankruptcy, is quite different from Chapter 7 bankruptcy. In a Chapter 7 bankruptcy, most of your debts are erased; in exchange, you must give up any property that isn’t exempt from seizure by your creditors. In a Chapter 13 bankruptcy, you don’t have to hand over any property, but you must use your income to pay some or all of what you owe your creditors over time (typically 3-5 years). The amount of repayment can range from 10% to 100% depending on the debtor’s income and cumulative of the amount owed.
Chapter 13 bankruptcy is the restructuring of an individual consumer’s debt with a new payment plan. If you have too much disposable income to qualify for chapter 7 or have assets you want to protect, you may want to consider this code. Your debt must be below a certain level and you must have steady income.
Your payments will be made to a Trustee who will distribute them in a manner called for in the court-approved plan. During this time the Trustee will have power over your (personal) finances and any credit-related matters will have to be cleared through him. Individuals will have no direct contact with their creditors while under Chapter 13 protection.
Homes - Perhaps the most significant advantage of filing chapter 13 is that it offers individuals an opportunity to save their homes from foreclosure. Filing Chapter 13 is an effective way for the debtor who is serious about keeping his home not only to stop a foreclosure, but also to get up to five years to make up the back payments while at the same time making regular payments going forward.
Motor Vehicles – If a debtor is behind on his automobile payments but the vehicle has not yet been repossessed, filing Chapter 13 Bankruptcy can stop the repossession and allow the debtor to keep the car by continuing to make the regular payments. In Chapter 13, the debtor can sometimes reduce the amount that he has to pay the lender for the vehicle if he has owned the vehicle for more than 910 days.
IRS Debt - Certain income taxes, if they are old enough, are qualified for bankruptcy discharge. In this case, the tax, the penalty and the interest all are discharged and the IRS would be stopped forever from trying to collect it. There are many tests and factors to be considered. An experienced bankruptcy attorney who handles IRS bankruptcy cases will be able to offer advice in this area.
Non-Exempt Assets - Another advantage of chapter 13 is that it allows people to reschedule secured debts (other than a mortgage for their primary residence) and extend them over the life of the chapter 13 plan. Doing this may lower the payments.
Divorce Related Debt - If a divorce has taken place prior to a bankruptcy filing, Chapter 13 may afford the debtor relief that may not be available in Chapter 7. In Chapter 13, if the debt is determined to be part of the property settlement, it will be treated just like any other unsecured debt, and the court will not oblige the debtor to pay it. If there is divorce related debt, legal counsel should be retained to weigh the advantages and disadvantages of Chapter 7 versus Chapter 13, including how the divorce-related debt issue would factor in.
Topics: Personal Bankruptcy |