Bankruptcy facts
Would you prefer Liquidation
Chapter 7 bankruptcy, also called liquidation bankruptcy, will wipe out your debt but you may end up losing some of your property because the bankruptcy court will liquidate i.e. sell your nonexempt property to pay off your creditors as much as possible.
Chapter 7 bankruptcy processes usually takes the least time to get completed, the entire process winding up in about four to six months. When filing for a Chapter 7 bankruptcy, you have to pay $299 towards filing and administrative fees and the process usually requires you to visit the courthouse only once, at the time of the creditors meeting.
Thus, Chapter 7 does appear a lucrative remedy for all debt problems but you must find out beforehand whether this remedy is available to you or not. If you have already received a bankruptcy discharge during the last six to eight years (depending upon which type of bankruptcy you filed for), or if after an examination of your income, expenses and debt, the bankruptcy court decides that you can carry out a Chapter 13 repayment plan, you will become ineligible for Chapter 7.
This brings us to Chapter 13 bankruptcy. In Chapter 13 bankruptcy, you have to use your income to pay off at least some or if possible, all of what you owe to your creditors, over a fixed time period. This period usually ranges from three to five years and will depend upon the size of your debt and income. Again, not everyone can file for Chapter 13. It requires that you must have some income, then only you will be able to repay some or all of your debt. So if the court concludes that your income is irregular or is too low, you will become ineligible to file for Chapter 13.
Also, if your debt burden is too high, again you cant file for chapter 13. What is meant by debt burden being too high This means your secured debts cannot exceed $922,975 and your unsecured debts cannot exceed $307,675.
Now the question is if you feel that you are left with no other alternative but to file for bankruptcy, should you look to wipe out your debts at the risk of losing your property or should you get a repayment plan approved by the bankruptcy court so as to get sufficient time to repay at least a part of your debt
Most people filing for bankruptcy usually choose Chapter 7 and the reasons are not hard to seek. Chapter 7 process is fast and effective, it wipes out your debt and its relatively easy to file. A typical Chapter 7 case opens and closes within four to six months. Even after bankruptcy, you will be able to keep most of your necessities and if you had little to begin with, in all likelihood, you will be able to keep most of the items, unless you have pledged an item as collateral when you bought it.
However, you need to be eligible for Chapter 7 bankruptcy, and everyone is certainly not. If the court decided that your income id regular and sufficient to fund Chapter 13 repayment plan, you wont be eligible to file for Chapter 7.
So the first and foremost reason why most people prefer Chapter 7 is that involves no repayment of any portion of your debt. On the other hand, in Chapter 13, there is an entire three to five year repayment plan so as to discharge your debts. Its another matter that majority of people filing for Chapter 13 fail to complete their plan. In such case, court may let you off the hook early on the basis of hardship. However, Chapter 13 offers some major advantages, too. We will discuss those advantages shortly. But before that, let us quickly see in which cases, Chapter 7 is not the right choice. There are three situations where Chapter 7 may not be the best option:
Are you judgment proof Most unsecured creditors must obtain a court judgment before they can start such unpleasant collection procedures like wage garnishment or seizure of personal property. If your debts are mainly of these unsecured types, your income is too small and all your property is exempt, there is nothing creditors can take away from you even if they went to the extent of getting a judgment. Thus, if you are judgment proof, why do you need to file for bankruptcy
There are some non-dischargeable debts which wont go away even after Chapter 7 bankruptcy. These include alimony obligations, back child support, student loans, recent income and other federal tax obligations, etc. now, if you find that bulk of your debt is non-dischargeable and will survive Chapter 7, there is no logic in filing for Chapter 7.
When filing for Chapter 7, keep inn mind that while certain kinds of property is exempt, others are almost never exempt. So if you have some nonexempt property which you just cannot afford to lose, there is no sense in filing for Chapter 7.
Instances where Chapter 13 is a better option.
While at first glance, you may feel that Chapter 13 involves repayment and is not as smart a choice as Chapter 7, there are situations where Chapter 13 is a better option.
If you are not eligible to file for Chapter 7 but you feel that you cannot pay your creditors without the help and protection of bankruptcy court, file for Chapter 13.
If you have missed a few payments of your mortgage or car loan, and need time to make up missed payments, Chapter 13 makes it possible, not Chapter 7.
If most of your debt obligations consist of debt that cannot be discharged by Chapter 7, such as student loan and tax obligations, its more logical to file for Chapter 13.
If you have nonexempt property that you desperately want to keep, file for Chapter 13 and not Chapter 7.
Thus, we find that both Chapter 7 and Chapter 13 have their own pros and cons and depending upon the nuances of a particular situation, one may serve the purpose better than the other. You need to analyze which one of these two options will serve you better, provided you are eligible for both of them.
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