What is the difference between a Chapter 13 and a Chapter 7 bankruptcy?
The main purpose of a Chapter 13, as opposed to a Chapter 7, is to enable a debtor to retain certain assets that would otherwise be liquidated by a Chapter 7 Trustee. In most cases, you can keep your home and your car under either plan (provided your equity does not exceed certain limits). However, under Chapter 7, you wouldn’t be able to keep your rental properties, antique gun collections, etc.
The goal of most Chapter 7 bankruptcies is to discharge your existing debts and allow you a *fresh start* on your finances. In other words, once your discharge is granted, you no longer need to repay the debts that were incurred before you filed your bankruptcy. Under a Chapter 13, however, you repay most or all of your debts before your slate, so to speak, is wiped clean. And because you repay your debts, you gain certain advantages over a Chapter 7.
Who can file a Chapter 13 bankruptcy?
Only an individual with regular income who owes, on the date you file the petition, less than $336,900 in unsecured debt and $1,010,650 in secured debt. These debts must also be non-contingent and liquidated, meaning that they must be for a certain, fixed amount and not subject to any conditions.
What are the benefits?
Chapter 13 protects individuals from the collection efforts of creditors; permits individuals to keep their real estate and personal property; and provides individuals the opportunity to repay their debts through reduced payments. Another benefit is that the time your Chapter 13 bankruptcy shows on your credit report is less, so it takes less time to rebuild your credit.
You may be able to discharge debts in a Chapter 13 that would be non-dischargeable under other Chapters, for example, fraud judgments.
How long does a Chapter 13 take to pay off?
The size of your monthly plan payments is determined by the amount you can afford to pay after paying necessary living expenses (including insurance, mortgage payments, etc.).
Typically, the Plan payments last for 36 months, unless additional time is requested, but in no event will they last more than 60 months. Therefore, if your payment analysis shows, for example, that you can afford to pay $200.00 per month (above and beyond your normal living expenses), you would pay that each month to the Chapter 13 Trustee, who would disperse it pro rata among your creditors. At the end of 36 months, you are discharged from all dischargeable unsecured debts, regardless of how much your creditors have received.
In addition to your plan payments, you must stay current with any ongoing obligations you have to secured creditors, such as on your mortgage. Chapter 13 (or any Chapter of bankruptcy for that matter) only affects debts that you owe on or before you filed the bankruptcy. Therefore, on your mortgages and other secured debts, your Plan payment goes to pay any arrearages that existed on the date you file and you can repay that arrearage over the life of the Plan; but, you must stay current from the filing date forward with any mortgage payments, etc.
Secured debts (your mortgages) must be repaid in full, but Chapter 13 enables you to cure the defaults (reinstate the loans) over 36 months (or up to 60 months with creditor consent and court approval). You also have the ability to eliminate junior liens from your real property (your mortgages) under certain circumstances and restructure mortgage and other payments.
OK, what are the disadvantages?
If you miss any payments at all that are due under your Plan, your case will be dismissed by the Court.
What’s the hit on my credit?
The bankruptcy will appear on your credit report for 10 years after you file. This means you will only have 6 years left with this on your credit report– a big advantage over a Chapter 7. Other accurate negative reports on your credit must be removed after seven (7) years (like late payments on credit cards, foreclosures, etc.). Your credit will most definitely be less damaged than had you completed a Chapter 7. The usual limitations will apply until the bankruptcy disappears off of your report: You will not get as high a credit limit as you once had nor will you be able to borrow a large sum of money. But getting some credit (such as a secured credit card) shouldn’t be that difficult and you will be able to rebuild your credit over time. What you will likely face is higher interest rates, required higher down payments, more points, etc. But you will be treated more leniently than a person with a Chapter 7. For instance– mortgage lenders will give you the benefit of the doubt, giving you preferred credit status over those filing Chapter 7 bankruptcy.
How does chapter 13 work? Who can file a chapter 13 case?
Debtors in chapter 13 keep all of their property, whether or not it is exempt, but they make regular payments on their debts out of the money that they earn after filing the bankruptcy case. These payments must be at least as much as would have been paid to creditors in a chapter 7 case. The payments are made to a trustee, who distributes the payments to the creditors. The payments are made in regular installments, according to a plan that the debtor draws up (usually with the help of an attorney). The plans last either until the debts are paid in full or until the end of a three to five year period. The debtor receives a discharge at the end of the plan. Some kinds of debts that are not discharged in chapter 7 cases, for example, debts arising from fraudulent use of a credit card may be discharged in chapter 13.
A chapter 13 case can be filed by most consumer debtors. There are two principal requirements: First, the debtor must have regular income, although this need not be from a job, regular benefit payments or rental income would qualify. Second, the debtor must not have excessive debt. chapter 13 is available only to debtors who do not owe more than $1,010,650 in secured debt (like home mortgages and auto loans), and more than $336,900 in unsecured debt (like most credit card debt).