Consumer Bankruptcy: Deciding Between Chapters 7 & 13
Consumer bankruptcy filings fell again in August. Filings have fallen every month this year compared to 2010, which is good news. Still, over 113,000 individuals filed for bankruptcy last month. Thirty percent of those were so-called "Chapter 13" filings.
Chapter 13 Offers Advantages over Chapter 7, but Takes Time
Most individuals may choose from two different forms of bankruptcy. All individuals may choose "liquidation." That’s a Chapter 7 bankruptcy. In brief, an individual in Chapter 7 surrenders most of his or her assets for payment to creditors. Individuals get to keep certain types of assets in limited amounts, called exemptions, to help with a fresh start. In Chapter 7, it’s "one and done." The individual comes out debt-free when the case is closed. It’s a relatively quick process.
Individuals with income whose debts do not exceed certain amounts may also choose "Individual Debt Adjustment." That’s a Chapter 13 bankruptcy. This resembles a consolidation loan. The individual proposes to pay down his or her debts over a three-to-five year period from income. At the end of that time, most remaining debts are discharged.
Chapter 13 has certain advantages over Chapter 7 for those who qualify.
- The most important difference between the two types of bankruptcy for individuals is that Chapter 13 provides a way for individuals to keep property if desired.
- This is especially helpful if the individual wants to save a home from foreclosure.
- With so many mortgages deeply "underwater" this currently is less of an advantage, though it remains an option.
- Chapter 13 also lets individuals adjust secured debts, often by extending the repayment period and/or lowering payments.
- Chapter 13 protects anyone who may be on the hook for a debt of the filing individual, such as someone who co-signed a loan with the individual.
- Finally, Chapter 13 lets the individual make total monthly payments to the bankruptcy trustee. The trustee sees to the division of the payments to the individual’s creditors.
So which type of bankruptcy is better? Bankruptcy of either sort is an important decision to be made with an experienced bankruptcy lawyer. Choosing between the two is a complicated decision, as is the process to be followed to successfully complete it. While Chapter 13 has certain advantages, individuals who qualify for both types can only know which is the right choice after going over all the details and options with their lawyer.
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