Chapter 7 & Chapter 13 Bankruptcy
The two most common types of bankruptcy filed by individuals are Chapter 7 and Chapter 13. However, many people do not know the differences between these two types of filings and which type of case they should file. The answer depends on the types and amounts of debts you have, as well as your income and what you hope to accomplish in your filing. Below is general guidance on the pros and cons of Chapter 7 and Chapter 13:
Before you can file a Chapter 7 case, you must pass the “means test,” which the court uses to ensure that individuals are not abusing the bankruptcy system. In other words, you cannot file Chapter 7 and eliminate debts you have the ability to pay. We will discuss the means test further in future blogs, so be sure to check back to learn more.
A Chapter 7 case offers you numerous benefits. As soon as you file your case, the automatic stay goes into effect and prevents creditors from taking collection actions against you. This means that harassing telephone calls from debt collectors, lawsuits, garnishments and other similar matters come to a halt. Additionally, the Chapter 7 process provides you the most comprehensive means for effectively and efficiently dealing with your creditors. A Chapter 7 case typically lasts only three to six months and you can discharge or eliminate the majority (if not all) of your debt. For many people, this means saving them thousands of dollars!
A Chapter 13 filing also provides you the benefit of the automatic stay, which means all collection activity against you must stop as soon as you file your case. The Chapter 13 process provides an individual the opportunity to both reorganize and discharge debt. To qualify for Chapter 13, you must have a regular source of income and the amount of your debt must be below a certain level. You create a plan of repayment that sets forth how you intend to pay your creditors (fully or partially) over a period of three to five years.
A Chapter 13 case can be advantageous to individuals who have valuable assets, such as real property, that they want to keep. Additionally, a Chapter 13 debtor is only required to pay a portion of the debt owed to unsecured creditors based on the debtor’s ability to pay. In many Chapter 13 cases, the unsecured creditors are only paid pennies on the dollar of what is owed to them.
In a Chapter 13 case, you pay one monthly payment to the Chapter 13 trustee who distributes the money to your creditors pursuant to the terms of your plan as approved by the court. Lastly, if you are underwater on your home and you have more than one mortgage, you may be allowed to “strip” the inferior mortgage lien and get caught-up on any past due payments on your first mortgage.
There are many pros and cons to consider when filing a Chapter 7 or Chapter 13 case. Contact a knowledgeable bankruptcy lawyer at Nielsen Law Group today. You can schedule your initial consultation by calling (480) 888-7111 or submitting a web request here.