J. Thomas Ash

The United States Bankruptcy Code provides debt relief for those who in good faith need relief. The Code provides immediate relief from debt collections, lawsuits, IRS levies, home and business foreclosures, repossessions and garnishments. Exemptions are available to protect some or all of your property. The Code is divided into chapters with each chapter setting forth the rules of a particular type of bankruptcy. Under Chapter 7 bankruptcy, you can wipe out debts for a fresh start. Chapter 13 Bankruptcy allows you to consolidate your debts into one low monthly payment. Chapter 11 Bankruptcy allows businesses to reorganize their debts. Chapter 12 Bankruptcy allows farmers to consolidate their debts without losing their farms.

Chapter 7 or Chapter 13 are the most common bankruptcy chapters filed by consumers. They have their differences, and the most notable differences are:

Chapter 7 Bankruptcy

A. Overview

Chapter 7 is a form of bankruptcy that allows you to liquidate your unsecured debt. Common examples of unsecured debts are credit cards, medical bills, payday loans, signature loans, repossession deficiencies, and judgments. If you stop paying unsecured debt there is not any property that the creditor can take from you because there is no collateral.

It is very common for people to get in over their head with credit card debt while shifting balances from one card to another. You’ve probably experienced it yourself. The lure is enticing with zero percent interest and free money. You would file Chapter 7 after you have exhausted all of your non bankruptcy options. However, it is all too common for people to make minimum payments for years, and attempt to work with their creditors, just to find themselves no worse off than when they started. Therefore, Chapter 7 Bankruptcy is a responsible way for you to reorganize your finances, liquidate your debt, and achieve the fresh start you deserve.

B. Benefits of Chapter 7 Bankruptcy

1) One advantage of filing Chapter 7 Bankruptcy provides you with a complete liquidation of your debt within four to six months of the filing of your case. There are no payments to your creditors.

2) Another advantage of Chapter 7 Bankruptcy is that creditors are required to comply with the bankruptcy code and must stop the following actions: harassing collection calls, garnishment of wages, pursuit of judgments through lawsuits, repossession and foreclosure.

3) A third advantage of Chapter 7 Bankruptcy, which is often overlooked, is that your credit could potentially be rebuilt faster after filing a Chapter 7 Bankruptcy than by not filing at all.

4) Lastly, many people are surprised that they are actually able to keep all of their property which can include your house, cars, retirement accounts, cash, and all household goods and furnishings.

C. Who Can File for Chapter 7 Bankruptcy?

Individual consumers are eligible to file a Chapter 7 Bankruptcy provided they meet the following criteria:

1. All Debtors filing Chapter 7 bankruptcy must pass a means test. The means test is a form that compares the Debtor’s income and expenses to the national IRS standards. This form is best completed by a skilled and qualified attorney. It is our experience that Debtors who previously qualified under the old bankruptcy laws, still qualify with the new bankruptcy laws. In fact, more than 96% of potential bankruptcy Debtors still qualify for Chapter 7 Bankruptcy.

2. In addition, Debtors are only eligible to file for Chapter 7 bankruptcy and receive a discharge of their debts eight years after a prior chapter 7 discharge.

D. How Does Chapter 7 Bankruptcy Affect my Credit?

Many Debtors are surprised when they learn it is possible to actually have a higher credit score within one year after completion of a Chapter 7 bankruptcy than if they had not filed. The truth is that bankruptcy is a negative reflection on your credit; however it is not the only factor creditors use when making a lending decision. Some of the positive effects that you will experience upon completion of your bankruptcy are as follows:

1. First, all of your eligible unsecured debt will be discharged. Therefore your debt to income ratio will be much improved.

2. Second, the negative payment history that is being used against you when creditors make lending decisions will be gone, and the line items on your credit report will show “Discharged in Bankruptcy.” Everyday that you put between the discharge of your case and the rest of your life, will continue to improve your credit score.

3. Third, continuing to make payments on the secured debts that you have elected to keep, such as a house or car, will establish a positive payment history. Most of our clients experience the ability to purchase a new home or car within one year of their bankruptcy discharge. It is also common to receive credit card offers right after you are discharged. Much is made about the fact that the bankruptcy discharge will appear on your credit for up to ten years after your bankruptcy, but the fact that bankruptcy appears on your credit does not mean that you will not experience positive lending opportunities.

Chapter 13 Bankruptcy

A. Overview

A Chapter 13 Bankruptcy is a reorganization of your debt. Unlike a Chapter 7, which simply liquidates your unsecured debt and no has payments, a Chapter 13 Bankruptcy is a powerful tool to pay creditors on terms that are favorable to you. This chapter of bankruptcy allows the Debtor to keep property that has delinquent payments. A Debtor normally utilizes a Chapter 13 Bankruptcy in the following situations:

1. First, a Chapter 13 Bankruptcy can allow a Debtor to stop the foreclosure of a residence or repossession of a vehicle. The Chapter 13 repayment plan allows the Debtor to take any mortgage arrears and pay back the mortgage company over a three to five year period. This provides the Debtor an opportunity to impose payment terms favorable to the Debtor, rather than unrealistic terms imposed by a creditor.

2. Furthermore, debts that may not be dischargeable in a Chapter 7 can be paid back through a Chapter 13 Bankruptcy. Examples of non-dischargeable debts are delinquent income taxes and back due child support. The Chapter 13 Bankruptcy allows the Debtor to repay these debts over the three to five year payment plan and in most situations prohibits wage garnishment.

B. Who Can File a Chapter 13 Bankruptcy?

A Chapter 13 Bankruptcy is an option for Debtors provided they have income or wages sufficient to fund a repayment plan. The bankruptcy code also sets certain debt limitations for both secured and unsecured debt. If a Debtor is over those limits, they are not eligible to file a Chapter 13 Bankruptcy. If you have a prior bankruptcy discharge under Chapter 7 or Chapter 13 you should consult our office to advise you of your eligibility.

C. What Debts can be Included in a Chapter 13 Bankruptcy?

When you file a Chapter 13 Bankruptcy case it is required that you list all of your debt. Debtors are often confused between listing debt and providing for repayment and discharge of those debts. There are three ways to treat debt through the Chapter 13 repayment plan.

1) The first category is secured debt that you are going to continue to pay yourself, outside of the bankruptcy. An example of this is your home so long as you are not behind on your mortgage payments.
2) The second type of debt is debt to be paid through the Chapter 13 repayment plan. This could be mortgage arrears, your car, furniture, or even IRS taxes and back due child support.

3) The third type of debt is debt that you will repay either a portion , if any, of the debt and it will be wiped out upon the discharge of your case. Examples of these debts are credits cards, medical bills, payday loans, personal loans, judgments, repossession deficiencies, and other unsecured debts.

D. How much do I have to Pay my Creditors in a Chapter 13 Bankruptcy?

The amount required to pay your Chapter 13 repayment plan depends on a multitude of factors. These factors include the outstanding delinquent payments on secured debt, the amount of secured or priority debts that the Debtor wants to pay through their repayment plan, and the Debtor’s personal ability to pay their debts based on their individual budget. The most accurate way to determine the approximate amount of your bankruptcy payment is to call our office and set up a free consultation. At the consultation, we will be able to tell you more details based on your specific circumstances.

Which Chapter is best for me?

There are numerous factors that you must consider in deciding which chapter is best for your case. One of the many services provided by our office is to review your financial information and help you decide which chapter, if any, would best resolve your financial problems.

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