| Which Bankruptcy To File |
| By Credit Federal |
Published
08/13/2008
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Financial Tips
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Which Bankruptcy To File? Chapter 7 or Chapter 13 Bankruptcy?
Employment struggles, rising costs of living and credit problems are encouraging more people to file bankrupty. But which type of bankruptcy to file? Below are the differences and benefits of Chapter 7 and Chapter 17 bankruptcy.
With bankruptcy, you can relieve all or part of your debts when you can no longer meet your financial obligations, but federal law now requires you to complete credit counseling before filing bankruptcy. In addition to credit counseling, there are other alternatives including an unsecured debt consolidation loan and to negotiate a settlement.
Chapter 7 allows debtors to discharge all or part of their debt. Chapter 13 orders debtors to repay all or part of their debt based on a payment plan.
Under Chapter 7 bankruptcy, you can have all or part of your debts discharged after your liquid assets (assets that can quickly be converted into cash such as checking and savings accounts) are used to repay some of the debt. Some of your liquid assets must be turned over to the courts to be distributed among your creditors as partial repayment of the debts you owe. These are non-exempt assets. Assets that cannot be used to repay creditors are called exempt assets. Your state has laws that dictate which liquid assets are non-exempt and which are exempt.
After any non-exempt liquid assets have been distributed to your creditors, any remaining debt is discharged and you are no longer liable for discharged debt. Furthermore, neither creditors nor third-party collectors can attempt to collect these debts from you.
To qualify for Chapter 7, you must pass a means test proving that your income is less than the median income for your family size in your state. If you fail the means test, you will not be allowed to file Chapter 7. Instead, you can file Chapter 13. In addition to passing a means test, you must receive credit counseling from an approved credit counseling agency.
Under Chapter 13, you repay all or part of your debt through a 3 to 5 year repayment plan. When you make the bankruptcy filing, you will also submit a repayment plan to the court. After submitting the plan, you should begin making payments to the court (who then pays your creditors). This is required even if your plan hasn't been approved.
Then there will be a hearing to approve your payment plan. Although creditors can object to the payment amounts, the judge has the ruling. After your plan has been approved, you'll continue making payments to the court. Once you've completed your Chapter 13 payment plan, any remaining debt is discharged and you are no longer liable for discharged debts.
You might choose to file Chapter 13 bankruptcy instead of Chapter 7 if you have secured debt, like a car loan, that you want to continue paying. Since Chapter 7 bankruptcy requires you to give up certain liquid assets, Chapter 13 might be a better option if you want to keep these assets. Furthermore, if your income above the median for your family size in your state, you will not be able to file Chapter 7 bankruptcy. According to the U.S. Bankruptcy Code, to file Chapter 13, you cannot have more than $922,975 in secured debt and $307,675 in unsecured debt. And, just like Chapter 7, you must receive credit counseling from an approved credit counseling agency.
Before you file bankruptcy, consider credit counseling, an unsecured debt consolidation loan or negotiate a settlement to chargeoff credit card accounts.
Get more bankruptcy information.
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