Should You File a Chapter 13 or a Chapter 7 Bankruptcy?

Interviewer: Are there two Chapters of bankruptcies, a Chapter 7 and a Chapter 13. What is the main difference between them?

A Chapter 7 Bankruptcy Discharges Unsecured Debt You Can Get Rid Of. A Chapter 13 Bankruptcy Requires a Repayment of a Portion of the Total Unsecured Debt Owed

John Reade: A Chapter 7 is basically where you get rid of whatever unsecured debt you can legally get rid of. If there are certain debts you can not get rid of, then you will have to pay these debts back. On a secured debt (such as a mortgage) loan on a home if you want to keep your home then you would have to continue to make the monthly payment.

In a Chapter 13, you are paying back some money owed to your creditors over a period of time, which is usually three to five years. So in a Chapter 13 one is in bankruptcy for three to five years. Chapter 13’s, generally, cost a lot more than a Chapter 7 bankruptcy. One of the reasons a Chapter 13 costs more than a Chapter 7 is because you are in bankruptcy for three to five years.

In a Chapter 7 from the time a person files until their court appearance, is normally about 30 days. A discharge date, which is normally when a Chapter 7 bankruptcy would be closed, is about 60 days after the court appearance known as the first meeting of creditors. The discharge date can be extended further because of something called a “reaffirmation hearing”.

Reaffirmation Hearing

A reaffirmation hearing is where a person goes before a bankruptcy judge, and the bankruptcy judge determines whether or not it would impose what’s called an “undue financial hardship,” on a person to make the payment on the car, or secured debt.

The judge will decide whether to approve the reaffirmation agreement, or not approve the reaffirmation agreement. A reaffirmation agreement that is approved by a bankruptcy judge, essentially takes that debt out of the bankruptcy. In other words, if a bankruptcy judge approves of the reaffirmation agreement then you keep the car (for example) and continue the make the monthly payments. If a person fails to make the payments on a car, if the reaffirmation agreement was approved by a bankruptcy judge and the car is repossessed the creditor can sue for the deficiency, or balance owed after they take the car and sell it.

Interviewer: In a Chapter 13 are you going to pay back some of your debts but only a certain percentage?

Why Choose To File For A Chapter 13 Bankruptcy?

John Reade: In a Chapter 13 you could have to pay back anywhere from a small percentage to 100% of your unsecured debt. The percentage you will have to pay back will depend on your income, your unsecured debts, and your secured debts, etc.

Interviewer: Why would someone file a Chapter 13 if he or she had to pay back most of the debt owed anyway?

John Reade: That is where the advice of an attorney who does a lot of bankruptcy work comes into play. Sometimes after explaining a Chapter 13 repayment plan to a person they may realize there is no economic benefit if they filed a Chapter 13. However, sometimes there may not be a benefit to filing a Chapter 13 over a Chapter 7.  In addition, there may be non bankruptcy alternatives, to filing a Chapter 13, that may be more beneficial, such as negotiating lump sum discounts with creditors. A potential bankruptcy client needs to be aware of not only what the bankruptcy alternatives are, but what the non-bankruptcy alternatives are so they can decide which alternative would be in their best financial interest.

A Chapter 7 Bankruptcy Is Finished In Usually 90 to 120 Days After It Is Filed; A Chapter 13 Lasts for 3 to 5 Years.

Interviewer: In terms of the process, how long does a Chapter 7 versus a Chapter 13 take?

John Reade: A Chapter 7 will normally take about 90 to 120 days from the date it is filed until a person receives their discharge and their case is closed. A Chapter 13 will normally take three to five years.

Interviewer: If circumstances dictate which bankruptcy to file, are there also strategies involved in the process?

A Chapter 13 Bankruptcy Is For People That Exceed the “Median Income,” Based on the Number of People in Their Household

John Reade: Often in a Chapter 13, the determining factor is if a person is at or above the median income for the number of people in their household. The median income is the income from all sources within the six months prior to filing, divided by 6 and multiplied by 12. If a person equals or exceeds the median income, based upon income for all sources within six months prior to filing, that could be forced to file a Chapter 13 rather than a Chapter 7.

Interviewer: It seems that everyone would want to file a Chapter 7 because of the benefits, and it is over far sooner. Or is it not really that clear cut? Are there benefits to a Chapter 13 that are not obvious?

John Reade: Sometimes there are benefits to a Chapter 13. I would say most people, if they financially qualify for a Chapter 7 (i.e. they are below the median income) and due to the much shorter period of time from start to finish, would prefer to file a Chapter 7, as opposed to a Chapter 13.

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