Filing bankruptcy is not an easy decision. There are several bankruptcy chapters in the bankruptcy code which may be daunting for someone faced with financial challenges. If you are considering bankruptcy, it is wise to seek legal advice so that one can make a sound decision to get out of debt. A bankruptcy lawyer is someone you can count on to enumerate the pros and cons of the different types of bankruptcy.
In personal bankruptcy, there are two most common types of bankruptcy: these are Chapter 7 and Chapter 13. While filing a Chapter 7 bankruptcy takes less time without requiring a repayment plan, Chapter 13 may be more suitable in some cases as it provides more debt relief.
The following are some advantages of Chapter 13 over a Chapter 7 bankruptcy:
- You can make up the missed payments over time and keep a home or car.
- You can pay tax obligations, domestic support, or other debts you cannot discharge in full over three to five years.
- You have more time to repay your debts.
- You can pay for the value of the nonexempt assets you keep through your three- to five-year repayment plan.
Below are the usual reasons why some people opt for Chapter 13 bankruptcy:
- To get rid of debts that cannot be discharged in Chapter 7.
Under bankruptcy laws, some debts cannot be written off with a Chapter 7 bankruptcy filing but can be discharged under Chapter 13. Examples include certain tax debts, a debt arising from embezzlement or fraud, government fines and penalties, and debts incurred from intentional injury to another person or property. A complete list of dischargeable debts in Chapter 13 is known as the “super discharge”.
- To reduce the debt owed on a certain property.
Because of the repayment plan, the monthly payments are spread out in three to five years, therefore, making payments more manageable.
Although you can reduce the balance on the value of some types of property when you file for bankruptcy in Chapter 7, you will be forced to pay the reduced balance in one lump sum payment, and not in installments spread out in a three-to-five-year repayment plan.
- To pay less money upfront.
In Chapter 7 bankruptcy, the attorney requires payment of all the fees prior to filing your case since attorney fees can be included in dischargeable debt. This can include unpaid attorney fees. As such, there are instances when clients cannot afford to pay attorneys fees upon filing Chapter 7. However, in Chapter 13, payments are settled directly in bankruptcy court to a Chapter 13 trustee. In some instances, the bankruptcy attorney may ask for lesser fees upfront and then collect the rest of the attorney fees from the Chapter 13 trustee, who pays your attorney out of your Chapter 13 payments.
- To prevent, repossessions, foreclosures, and garnishments.
As soon as you file for bankruptcy, an automatic stay is activated. This means your creditors have to stop all collection efforts including attempts to foreclose on your house or to repossess your car. In Chapter 13, the automatic stay runs for as long as the Chapter 13 case goes, which can be as long as five years as opposed to Chapter 7 where the stay is only effective for up to a few months.
- To allow more time to settle auto loans and mortgage payments.
Aside from preventing foreclosure and repossession, bankruptcy filing allows more time to catch up on overdue payments. Chapter 13 bankruptcy allows settlement of past dues called arrears in more manageable monthly installments. These are settled through the Chapter 13 trustee, who in turn will pay back the creditor. Once the Chapter 13 repayment plan is over, assuming you kept your ongoing payments current, you are up-to-date on your loans. For this reason, Chapter 13 is also classified as a reorganization bankruptcy.
- To save property you cannot bear to lose.
When one files for Chapter 7 bankruptcy, the items that may only be kept are the “exempt property”, which are possessions protected from creditors. Bankruptcy exemption laws vary from state to state but are basically lists of things you are allowed to keep and still file bankruptcy. A bankruptcy filer is required to give up nonexempt property to the bankruptcy trustee, a person assigned in the liquidation of assets in order to pay the creditors. In Chapter 13 bankruptcy, there is no need to give up any of the possessions. Debts may be repaid out of the monthly income, which is why Chapter 13 is also known as the “wage earner’s plan”. To be clear, in Chapter 7, the bankruptcy trustee sells all nonexempt assets. In Chapter 13 bankruptcy, the filer has the option to settle the value of the nonexempt assets that he or she wanted to keep, through a payment plan.
- To pay off certain debts
There are instances that one has to settle specific debts that you cannot pay off due to unforeseen circumstances such as sudden illness or loss of a job. Such instances, which may be proven in a means test, which lays out that there is not enough disposable income to settle the bills. Such availability of regular income, on the other hand, disqualifies one to file for a Chapter 7 bankruptcy. In this case, it makes sense to file for Chapter 13 bankruptcy. Doing so helps in paying off the bills spread out over a course of several months.
Are you looking into filing bankruptcy in California?
Our Pasadena Law bankruptcy attorneys will be able to help you decide which bankruptcy chapter works best in your situation. Call us for a free initial consultation.