There are two legal processes in the United States for dealing with your debts. Chapter 7 bankruptcy, also known as "straight bankruptcy" or liquidation bankruptcy, involves surrendering your assets in exchange for eliminating your unsecured debts, like credit cards. If your assets are exempt, you may not lose anything.
The other process is Chapter 13 bankruptcy, also known as a "Wage Earner's Plan". Under Chapter 13 you retain control of your assets, but you are required to make monthly payments for a three to five year period to repay your creditors.
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At first glance it may appear that, for someone with a lot of debts, a Chapter 7 bankruptcy is the best option: you don't have to repay your creditors, the process ends relatively quickly, and if you have no assets, you have no assets to lose. Chapter 13 seems like a worse alternative, since you will probably be making payments for the next five years.
However, there are some obvious reasons why a Chapter 13 Wage Earner Plan is the better option.
First, thanks to the 2005 Bankruptcy Reform legislation, all potential bankrupts are subject to a means test; if your income is too high, you cannot file bankruptcy under Chapter 7; you must file under Chapter 13.
Second, a Chapter 13 Wage Earner Plan generally allows you to retain all of your assets, so if you would lose assets in a Chapter 7 bankruptcy, Chapter 13 may be the correct option for you. Each state has a list of assets that are exempt if you file a Chapter 7 bankruptcy (exempt means you don't lose them when you go bankrupt). It is important to have your bankruptcy attorney review the list of exempt assets for you, so that you know what you will lose if you file a Chapter 7 bankruptcy. If you will lose assets, Chapter 13 may be the best option.
Finally, if you are about to lose your home through foreclosure because you are behind on your mortgage payments, a Chapter 13 Wage Earner Plan may be the only logical option. While a Chapter 7 bankruptcy may delay foreclosure, it does not prevent it. In the worse case your Chapter 7 bankruptcy many require that the property to be sold to repay the mortgage debt. In a Chapter 13 Wage Earner Plan, you may be able to negotiate with the mortgage holder to get caught up on the mortgage arrears as part of the court approved repayment plan. If the lender agrees and if the mortgage is brought up to date, the bank will not foreclose on your home.
As you can see, it may appear that a Chapter 7 bankruptcy is the quickest and cheapest option, but for many debtors a Chapter 13 Wage Earner Plan is the correct option. The rules are complicated, so seek the advice of a competent bankruptcy attorney before making your final decision.
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