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Friday, June 8, 2012

Bankruptcy Chapters 7 or 13: Which Is Better For You?

During an economic crisis, we imagine that we will see a huge increase of bankruptcy filings. However, when economic times are relatively good for the majority of the population, bankruptcy still becomes the only way out of a bad financial situation for many people.

In fact, about one and half million people filed for bankruptcy in 2008 when the economy began to suffer. But over two million people filed for bankruptcy in 2005 when statistics from the Chamber of Economic Advisory Council showed that year to be stable and promising.

Interest rates were up, agriculture commodities strong and real estate was showing a record in home sales. So, with that thought in mind, there are any number of reasons that can cause individuals to seek relief from financial debt through a bankruptcy.

Divorce, loss of a job, health issues and other factors contribute to many people being unable to pay their debts. Some people simply cannot even pay living expenses, never mind their other debts and obligations. For these people, bankruptcy chapter 7 may be the best option.

This type of bankruptcy is for those with limited or no assets. With this type of bankruptcy, a person’s debts will be liquidated or completely eliminated. Debtors cannot contact the person during the process as soon as they are notified of bankruptcy proceedings and they cannot contact the person once their debts have been discharged.

Under new bankruptcy laws, you must sit through a pre-filing session with a debt counselor and pass a “means” test disclosing income and assets to validate the need for bankruptcy protection. The process for a chapter 7 bankruptcy usually moves very quickly, possibly receiving discharge of debts within a few months of filing.

Most of a person’s unsecured debts will be eliminated with the exception of current federal and state taxes owed, student loans and certain judgments. One setback to a chapter 7 bankruptcy is that even though your debts are wiped out, any co-signers on your loans may be contacted by your debtors to collect on your debts.

Also, new bankruptcy laws give the right to bankruptcy trustees to sell any assets of value that a person has to pay off debt obligations. But usually there are no assets to sell in this type of bankruptcy. Bankruptcy chapter 13’s are for individuals who have a higher income and valuable assets like a home or other property that they would like to keep, but some temporary issue is making it difficult to keep up with their payments or debt obligations.

In this case, your bankruptcy trustee will organize your debts into one monthly payment plan and send out these payments in your behalf originating from the funds he receives from you. Before you can file for a chapter 13 bankruptcy you will be required to complete a financial management course including the consideration of other possible options to bankruptcy. 
You will have 3-5 years to pay off these debts and debtors will not be able to contact you or try to collect more from you during this period. You will be able to keep most of your assets and property with this type of bankruptcy filing and anyone that co-signed for you on loans will also be protected during this period.

You can qualify for a bankruptcy chapter 13 if your unsecured debts are not more than about $337,000 and your secured debts do not exceed a little more than a million dollars. The main benefit of filing a chapter 13 is that this process will stop foreclosures, repossession and garnishments. 
However, the main setback to this type of bankruptcy is that it is a very complicated process that takes longer than a chapter 7 and if your lawyer is not proficient and mistakes are made, this can create financial headaches for you for years to come.

If you qualify for either type of bankruptcy, you will be asked to provide a great deal of personal and financial information concerning your income, assets and debtors. Either type of bankruptcy will remain on your credit report for up to ten years and will affect your ability to obtain credit or financing.

But for some, if may be the only option to avoid financial disaster and it should always be the last option.

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