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2007-05-17 05:09:31

Chapter 7 vs. Chapter 13 Bankruptcy

Generally, about one and half million people file bankruptcy annually, and for many Americans this has become a fact of life. If truth be told, a growing number of people who file bankruptcy are educated, mid-range baby boomers with an extreme level of credit card debt. Still, not only this class suffers from bankruptcy. Bankruptcy can be an alternative for a person who has reached a point where they can no longer support the debts they have incurred.

What Kind Of A Fellow Is This Bankruptcy?

Bankruptcy allows individuals to discharge from debts or, in plain words, a person legally owes nothing to the creditors any more. Bankruptcy affords working out a repayment plan that will let a debtor who cannot pay the creditors, to disburse the debts dividing assets among the creditors.

Bankruptcy is also aimed at liberating some debtors from financial responsibilities that have been accrued. This is possible after their assets are allotted, even if they have not and cannot pay off pay all debts.

You have 2 options in filing for individual bankruptcy.

Chapter 7 bankruptcy (straight bankruptcy)

Chapter 7 deals with liquidation - a debtor is to prepare a request listing of assets and money obligations, submit it to a US district court and pay a fee for filing. In Chapter 7 bankruptcy many (not all totally) debts are let off as most part of the debtors property is sold to repay the debt. Still, some assets are protected in certain terms.

Release from debts through Chapter 7 does not include:

fines

alimony

certain taxes

child support

some educational-loan-related debts

debts that you fall short of disclosing to the bankruptcy court.

debts following the loans you took presenting the creditor a false financial statement (at creditors request).

debts resulting from fraud, embezzlement, driving intoxicated, robbery or other deliberate or with malicious intent acts.

For Chapter 7 you must produce full information on finances in a petition: forget a debt, and it may not be canceled. Whats disreputable, when you do not list all your assets, you could afterward be legally responsible for fraud.

Filing for bankruptcy you automatically prevent your wages from being garnished, checking or savings account unfilled, and yourself from being prosecuted or sued for failure to pay.

After the bankruptcy procedure, you will not have to pay dischargeable debt that in Chapter 7 includes:

most unsecured loans

some court decisions against you

back rent you are due to a landowner

unpaid bills for legal or medical services

documentarily proved loans from friends or family

unpaid bills for public utilities (phone, gas, electricity)

bills for credit cards, gasoline cards, department store cards, charge cards

You are responsible for debt not included in the debtors discharge. It may be a loan that was issued, funded, secured or assured by an entity of the Government or a nonprofit company.

Chapter 13 bankruptcy (wage earner plan)

In a Chapter 13 bankruptcy, one with steady earnings who owes a debt, produces a plan for liquidating debts to a bankruptcy court, taking future earnings or other property into account over an amount of time. In such case, the debtor usually maintains all or major part of the property.

Throughout the period the repayment plan is valid (up to 5 years) the debtor makes regular payments to a trustee assigned according to Chapter 13. The trustee divides the money among the creditors.

In some situation, the bankruptcy court may confirm a plan granting the debtor the right to maintain all assets although the repayments will be less than the full debt amount. Some debts non-discharged under Chapter 7 may be discharged in Chapter 13 if the debtor manages to fulfil the plan.

You will come through the same preparatory procedures as for Chapter 7 bankruptcy.

As for unsecured debts, including debt on credit card, you will have to propose a repayment plan to the court. The court will admit or decline your plan.

As for secured debts, you agree to pay off, at least the amount your creditor claimed and will agree to, otherwise, you agree to give the collateral.

What is better? Benefits and shortcomings of Chapter 7 and 13 bankruptcy

Your decision depends on your personal financial circumstances. Each type of bankruptcy has its benefits and shortcomings. Having serious problems with money, you will surely choose Chapter 7 procedure, if its possible to attain it.

Type of bankruptcy Benefits Shortcomings
Chapter 7

quicker to finish

helps to start over

the total of unsecured debt you can cancel is limitless if all property and debts were stated and there is undoubtedly no fraud in your listing

you must surrender your nonexempt property to the court and permit it to be sold

after you file, some of your debts may remain (a car loan or debts incurred to deceive the creditor)

Chapter 13

you maintain all your property, whether it is exempt or nonexempt

you are allowed to break up your debts by class - creditors of different classes require different payment percentages

you have a longer repayment period

your total debt has to be under $1,077,000 (secured debt - less than $807,750, unsecured debt - less than $269,250)

you pay off your debts from your income

if debts remain after your bankruptcy, you have to pay them off which could have seriously damage your expected income

How frequently you can file for bankruptcy

A person may have good net assets but nevertheless get into financial troubles. Bankruptcy occurs when a person goes beyond available assets and is incapable to pay off outstanding debts. In this situation, bankruptcy may be a good option.

Conforming to the law, you can file for Chapter 7 bankruptcy one time in 6 years. The majority of Chapter 13 plans allow 3 to 5-year payments.

Although theoretically you can file for Chapter 13 bankruptcy as frequently as required, you will unlikely file more often than your payment term. To enhance your net assets, avoid bankruptcy - increase your savings and the value of vested interests as well as other possessions, and reduce spending and the sums you owe.

After bankruptcy people may have difficulties in taking credit, however, not always. Some debtors feel it easier to get credit having erased the debts or even because creditors consider they cannot file another bankruptcy for some period.

Obtaining credit may be easier for those who file for Chapter 13 and pay off a part of their debts. People who submit for Chapter 7, make no effort to pay off.

The bankruptcy law forbids your employer to discharge you because you have filed bankruptcy and you will be able to re-build your credit through secured credit cards. The fact that you filed for bankruptcy stays on your credit report for 7 to 10 years after the fact.

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