Thursday, November 26, 2015

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What’s The Difference Between Chapter 7 And Chapter 13 Bankruptcy?

Bankruptcy, part of the U.S. Constitution, is common these days as many Americans struggle to work their way out of debt and find a solution to their overwhelming and overbearing financial situations. The concept of bankruptcy dates back to our founding fathers that back then saw that suffering from severe economic misfortune along with making poor financial choices could happen to the most honest of people. It was a means to helping those people get a fresh start at rebuilding their financial lives.

There are three types of personal bankruptcy, Chapter 7, Chapter 12, and Chapter 13. Knowing the difference between the them is essential when considering filing. Chapter 12 is restricted to family farmers or fisherman. Chapter 7 is the most commonly filed by individuals, married couples and domestic partners. Chapter 13 may be filed as well by the aforementioned but is less rare.

Chapter 7 Bankruptcy

Under the U.S. Bankruptcy code, Chapter 7 is considered a “liquidation”. Sometimes this chapter will be referred to as a straight bankruptcy being that  most of a person’s debt will be wiped out. In some cases you will have to surrender some of your property but you won’t have a repayment plan for your debt. Essentially, your debt is wiped out forever. What you acquire after your bankruptcy is cleared is not subject to being wiped away; nor is any property you obtain with the case of a few exceptions.

If you have an income tax refund coming your way after you have filed bankruptcy, it will be put towards repaying your debt. The same goes for any divorce property awards, life insurance benefits, and/or inheritances that you are entitled to receive within 180 days of claiming bankruptcy.

Bankruptcy debt can effect your assets

You, the debtor, can have your assets seized by the court in an effort to sell them and pay back your creditors but this is pretty rare. In fact, 96% of personal bankruptcy cases are considered “no-asset” cases which means there is no property taken from the debtor. It’s either exempt or of such little value that it’s not worth the courts time to take it.

In order to qualify for a Chapter 7 bankruptcy filing, you will need to earn more than the median income for the state you live in and pass what is called a Means Test. This is to determine if you truly can’t pay off their debt. You will be asked to provide all information pertaining to your debt, income, cost of living expenses, and other factors that would determine whether or not you qualify to file. It’s a bit time consuming but it is important that you are honest and thorough when you take the test.

Chapter 13 Bankruptcy

This type of bankruptcy is considered a “reorganization” and involves having a repayment plan in which you pay all or a partial amount of your debt back in the course of three to five years.

In this case a debt repayment plan will be submitted to the court and if approved will enable you to make repayment without your creditors hassling you as long as you are making your payments according to your repayment plan. It is important that the agreed upon repayment plan is realistic and feasible. If not, you are taking a big chance on not being able to keep your payment commitment.

There are two tests that must be taken and passed in order to file for Chapter 13 bankruptcy. The best-interest test and best-efforts test. The former mandates that unsecured debtors are paid back at least as much as they would receive had you filed Chapter 7. The latter requires that you pay all disposable income to the trustee for a minimum of the first 36 months of your repayment plan. (Disposable income meaning any income left over after you have paid for reasonable living expenses).

A good bankruptcy lawyer will help you determine which chapter you should file. Be patient because the process takes about 6-12 months and requires a great deal of paperwork and documentation. In the end, you will have a fresh start and the ability to have a handle on your future finances.

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