In the United States, most bankruptcies are filed under Chapter 7 or Chapter 13. Determining which one fits your situation will depend on your income, your debts and your assets, along with your financial goals. You should consult with a bankruptcy attorney before moving forward with either option.
What You Should Know
While bankruptcy law will eliminate some of your debt, that doesn't mean it will erase all of it. Prior to filing for bankruptcy, you should know exactly where you stand with your financial obligations. Generally speaking, you can eliminate credit card debt through both types of bankruptcy. However, there are certain types of debt you may still have to deal with, such as alimony, child support, student loans, taxes, and secured debt. In certain cases, Chapter 13 may help while Chapter 7 will not. This are matters on which your bankruptcy attorney will advise you.
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Filing Under Chapter 7
This liquidation bankruptcy law is intended to eliminate most of your unsecured debt, including medical bills and credit card payments. Note that you will need to demonstrate virtually no disposable income in order to file for this type of bankruptcy.
If you decide to take this step, a trustee will be appointed to handle your case. Along with reviewing the required papers and supporting documents, the trustee is also responsible for selling any nonexempt property you have in order to repay your creditors. Your creditors will receive nothing if you own no property. Consequently, Chapter 7 bankruptcy is mainly intended for low income applicants who want to clear up their unsecured debts and have virtually no assets.
Filing Under Chapter 13
This is a reorganization bankruptcy law intended for those who have regular income and are able to repay at least part of what they owe with a reorganization plan. If you cannot qualify for Chapter 7 bankruptcy because your income is too high, taking this route may be your only option. It's worth noting Chapter 13 provides several benefits that are unrelated to your income.
With Chapter 13 bankruptcy, you will be able to retain your nonexempt assets along with the rest of your property. In addition, the amount you owe will be based on your income, your expenses, and the nature of your debt.
Since reorganization is the key element here, it was designed for applicants who are able to make monthly payments. Such applicants can typically get back on track in the event they have missed car or mortgage payments, and can keep up with those payments going forward. You will also be required to pay off your nondischargeable debts, including child support or alimony arrears.
Things You Can Do By Filing For Chapter 13
You can avoid mortgage foreclosure. The lender will be compelled to accept a plan in which you submit the payments you have missed within a certain period of time while keeping up with your current payments. To establish this kind of plan, you must prove that, in the future, your income will be sufficient for you to abide by these requirements.
Because your future income will be used for funding your repayment plan, you will be able to keep any nonexempt property you may have.
In some cases, debtors can reduce a debt based on the replacement value of the property that secures it, and then clear up the debt through their replacement plan. For example, suppose you owe $15,000 on a car loan and the vehicle is only worth $11,000. You can present a plan that will pay the creditor $11,000, and the balance of the loan will be discharged.
However, as your bankruptcy attorney will advise, you cannot force this type of loan if you bought the vehicle within the 30-month period prior to filing for bankruptcy. With regard to other personal property, you cannot force such a plan for a secured debt if you bought the underlying property within the 12-month period prior to filing for bankruptcy.
The decision to file for Chapter 7 or Chapter 13 bankruptcy should not be made lightly. It is highly recommended that you speak with an experienced lawyer who can advise you regarding which option best accommodates your circumstances.
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