As any attorney will tell you when you ask them a question – it depends. Essentially, the United States Bankruptcy Code provides two avenues for an individual to declare bankruptcy – Chapter 7 and Chapter 13 – which lead to drastically different outcomes. Chapter 7 bankruptcy, generally known as liquidation, involves discharging some or all your debt but surrendering your assets, such as property or cash. Chapter 13, generally known as repayment plans, allows you to keep your property and repay your debts in a three- to five-year repayment plan. Before even considering either option for individual bankruptcy, you should first consider what type of debt you have. For example, neither Chapter 7 nor Chapter 13 allows you to discharge child support, alimony, or certain taxes.
Chapter 7 allows you to discharge some or all your debt. This option is for those who typically have little to no disposable income. You will have to pass what is known as the means test to prove that you cannot afford to repay your debt. Chapter 7 can reduce your monthly debt-repayment load because once a debt is discharged you are no longer legally obligated to pay that debt back. This means the money you were paying toward a loan or a credit card can now be used for other things such as household necessities. There are several exceptions to the debts that can be discharged in Chapter 7, so we recommend contacting a bankruptcy attorney at Feldmann Nagel Cantafio & Song PLLC before you file.
Chapter 7 can provide relief from debt collectors by temporarily restricting creditors from collecting money from you, contacting you, continuing wage garnishment, or starting or continuing a lawsuit against you or your property. Additionally, Chapter 7, which generally takes ninety to one-hundred days, may be able to clear your debts faster than chapter 13, which typically takes three to five years. Even though Chapter 7 has some benefits when compared to Chapter 13, there are some substantial drawbacks.
First, you will lose some assets depending on the laws of your state and whether you have equity in certain assets. Your cash or property will be at stake. Second, your credit score could take a hit. A Chapter 7 bankruptcy can stay on your credit reports for up to ten years which will influence your ability to take out a new credit card, a mortgage, or other loans in the future.
Chapter 13 is the option you should choose for bankruptcy if you do not qualify for Chapter 7 under the means test or if you own property you want to keep. If you have sufficient income, you may be required to file for Chapter 13. Chapter 13 can stop debt collections and foreclosures which may help you catch up on your past-due mortgage payments. Consolidation of debts into one easy monthly payment is another advantage to filing Chapter 13. Your lump-sum payment will be distributed among your creditors. Chapter 13 will also have a less severe effect on your credit score than Chapter 7. However, Chapter 13 is not without its drawbacks.
As mentioned previously, Chapter 13 can take anywhere from three to five years to finish paying off your creditors. The repayment plan under Chapter 13 can also put a strain on your budget, especially if your income is variable. Even worse, is that if you are unable to stick to the Chapter 13 repayment plan you may be at risk of having your bankruptcy case dismissed or having it converted into a Chapter 7 bankruptcy which can mean that your assets – such as your home or vehicles – are in danger. Your repayment plan may also be at risk of being dismissed or converted to Chapter 7 by the court if you fail to file required taxes during your case or if you fail to pay domestic support obligations, such as child support and alimony, after filing for bankruptcy.
Regardless of your reasons for filing bankruptcy, having an attorney look at your financial well-being is imperative to pick the right plan for your specific situation. The lawyers at Feldmann Nagel Cantafio & Song PLLC can guide you through this difficult process so call today for your free consultation.