The choice between a Chapter 7 and Chapter 13 bankruptcy depends on the client’s financial situation, legal obligations and future plans. A Chapter 7 allows for the complete discharge of most debts. The client gets a fresh start.
A Chapter 13 requires debts be repaid on a payment plan that lasts between 3 and 5 years. Some debt may be discharged upon completion of the plan, but most debt is repaid. The client must repay in full debt for property he or she wishes to retain, such as a home.
When Does a Chapter 7 Make Sense?
There are several situations where a Chapter 7 makes the most sense, including the following:
The Debtor Has No Property Subject to Liquidation
In a Chapter 7, the debtor must agree to the seizure and sale of all assets that are not protected under the bankruptcy code. The court collects the money from the sale of these assets and redistributes it to the creditors.
A bankruptcy filing requires the debtor to disclose all assets. In addition, Chapter 7 bankruptcy cases involve a “meeting of the creditors”, which is a hearing where the petitioner must answer questions about assets, so the court can ensure any eligible property or funds are seized.
If you have no property subject to liquidation by the court, a Chapter 7 makes sense. For example, most personal items, such as clothing, furniture and housewares, are retained by the bankruptcy petitioner. Many jurisdictions also allow petitioners to keep their mortgaged homes if the equity is below a certain level. Chapter 7 bankruptcies are far less expensive than Chapter 13 bankruptcies, so when there is no property to lose, they are the ideal way to dispose of overwhelming debt.
The Debtor Wishes to Reaffirm Certain Debts
A Chapter 7 bankruptcy allows the petitioner to reaffirm debts tied to property he or she wishes to retain. For example, a debtor may file bankruptcy because of unmanageable credit card debt. He or she may own a financed vehicle with no equity and wish to keep it. The solution is to wipe out the credit card debt via a Chapter 7 and reaffirm the auto loan.
When a loan is reaffirmed, the debtor must make all scheduled payments in full. Chapter 7 bankruptcies give the debtor an automatic stay, which prevents creditors from collecting money, seizing property or taking legal action. However, the debtor remains responsible for the payments on reaffirmed debt that accrue while the case is open.
The Debtor is Subject to Ruinous Wage Garnishments, Bank Levies and Property Seizures
Wage garnishments automatically remove money from the debtor’s paycheck, while bank levies involve pulling money directly from the debtor’s bank accounts. Either of these actions can force the debtor into insolvency. When the debtor is left unable to support himself or his family, whether immediately or over time, a Chapter 7 bankruptcy may be the best solution.
As soon as the case if filed, all wage garnishments, bank levies and property seizures must stop. The debtor can then discharge the debts in bankruptcy, allowing him or her to become solvent again.
When Do Chapter 13 Bankruptcies Make Sense?
Chapter 13 bankruptcies restructure debt rather than eliminating it. While a fresh start can be helpful, it makes no sense if you have significant assets subject to court seizure in a Chapter 7.
For example, imagine a client has run into business trouble or lost a job. He or she believes the situation is temporary, but it has caused insolvency. There is simply not enough income to satisfy all financial obligations, but the client would not want to file Chapter 7 because he or she has a home with $300,000 in equity. A Chapter 13 bankruptcy, also known as the “home saver” bankruptcy, would allow the client to restructure debt, become solvent again and keep the valuable home.
Chapter 13 bankruptcies often make sense when a foreclosure lawsuit has been filed. A foreclosure can destroy much or all of a family’s home equity. A Chapter 13 filing stops the process and allows the debtor to restructure payments, so the property can be retained or eventually sold at a profit later.
Bankruptcy helps millions of Americans escape from the cycle of endless debt and poverty. They can leave behind ruinous economic conditions that prevent them from living their lives to the fullest.
If you are overwhelmed by debt, you need a plan to eliminate it. If no workable plan exists outside of bankruptcy, then the faster you file, the sooner your financial problems will stop holding you back.
Hines Law is a full-service bankruptcy firm serving residents throughout Massachusetts. With over 20 years’ experience in personal bankruptcy, our attorneys have the knowledge and expertise ensure the right debt solution for your situation. If you think personal bankruptcy may be an option for you, call our Bankruptcy Firm for a Free case evaluation.