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Filing Bankruptcy: Chapter 13 vs. Chapter 7
By Susan Willets | June 10, 2008
An individual who is deep in debt can file for bankruptcy under Chapter 7, also known as straight bankruptcy, or Chapter 13, also known as reorganization. Both options have their pros and cons when it comes to avoiding or stopping foreclosure. Be sure to talk with an attorney to discuss your options and find out what’s best for your situation. In the meantime, here’s information to offer some insight on the two options and help get you started.
What is Chapter 13 Bankruptcy?
Under Chapter 13, you would propose a plan to pay your creditors over a set period of time (usually 3-5 years). This written plan details all of the transactions (and their durations) that will occur, and repayment according to the plan must begin within thirty to forty-five days after the case has started. During this period, your creditors cannot attempt to collect on the amount you are delinquent except through the bankruptcy court. In general, you will get to keep your property, and your creditors end up with less money than they are owed.
Advantages
Some advantages are that you can possibly save your home from foreclosure by filing Chapter 13. It also allows for discharge of more types of debts than Chapter 7.
Disadvantages
While this may seem like a wonderful way to get your payments back on track, there are consequences for taking such action. The filing of bankruptcy will stay on your credit record for 10 years, making it unlikely that future creditors will lend money to you. Also, during the time that your case is active, you will not be able to obtain any lines of credit without the approval of the bankruptcy court.
How Can Chapter 13 Bankruptcy Help Save My Home?
If you are able to continue making your current mortgage payments along with your payments from your plan to pay off your past-due debt, you will be able to keep your home from being foreclosed. If you have second and third mortgages, you may be able to eliminate payments on them all. If your home has dropped in value, you will no longer have equity to cover all of those loans and they become classified as “unsecured debt”. Filing Chapter 13 may not require that you pay unsecured debt back at all.
What is Chapter 7 Bankruptcy?
Chapter 7, also known as straight bankruptcy or liquidation, is the most common form of bankruptcy. It allows for the individual to keep a few exempt items and all other assets are sold to pay off the debt. One exception to this is a mortgage. If you file Chapter 7, you will not be able to keep your home. However, you may be able to stay in it for a few months, or as long as your case is pending. This time should be wisely utilized to make new living arrangments. Regardless of your situation, the laws and requirements for filing Chapter 7 have gotten much stricter and the government is watching for cases of filing “abuse.” Your legal advisor can help you determine the right option for you.
Advantages
Aside from cancelling most of or all of your debt, filing Chapter 7 also makes you exempt from tax liability on any losses your lender incurs. This can be a major relief to many individuals as this is often an unexpected expense and stress with foreclosure.
Disadvantages
Again, a major disadvantage is the damage that bankruptcy does to your credit report. Filing for Chapter 7 will remain on your credit report for 10 years, making it difficult to obtain financing in the future. However, it’s also important to keep in mind that typically by the time an individual files for bankruptcy, their credit score is usually already ruined from the accrual of late payments, etc.
There have been cases of abuse with the bankruptcy system, with individuals using it as a quick fix to eliminate their debt and keep most of their possessions. This abuse has lead to the goverment monitoring the process and the necessity of filing much more closely. If it is found that you should be able to pay off some or all of your debtors within a 5 year time frame, you may be forced into filing Chapter 13.
How Can Chapter 7 Bankruptcy Help Save My Home?
If you’re going to lose your home no matter what, filing Chapter 7 may buy you some time. You can use this time work to with your lender or save up some money to pay off the missed payments. While your case is pending, you will not be required to make payments, but will be allowed to stay in your home. Use this time wisely to save money to use on a new home.
Topics: Bankruptcy and Foreclosure |