Why Would I Want to File Chapter 13 Bankruptcy?

Erasing DebtOn the surface this is a great question. If you know only a little bit about bankruptcy, then you probably know that chapter 7 bankruptcy discharges many unsecured debts. That means you’re no longer obligated to pay those
debts.

Chapter 13, on the other hand, involves a 3 to 5 year repayment plan. Many people wonder why someone would choose to enter into a 3 to 5 year repayment plan rather than wiping the slate clean and getting a fresh start. Sometimes, it’s simply a matter of choice. Some people don’t feel good about walking away from their debts, but can’t afford to pay them as scheduled. Chapter 13 offers the breathing room to to pay those debts over time without collection actions and late fees.

More often, people choose chapter 13 Because they aren’t eligible for chapter 7, or because chapter 7 won’t help them achieve their goals.

Eligibility for Chapter 7 and Chapter 13 Bankruptcy

Qualification for chapter 7 bankruptcy is based in large part on your income. If you make too much money you probably won’t be able to file for chapter 7 bankruptcy. You won’t be disqualified from filing Chapter 13 because you make too much money. In fact, chapter 13 requires that you have a reliable source of income to make plan payments. People who had a break in income or a large unexpected expense but now have a stable income may not qualify for chapter 7. But a chapter 13 repayment plan may allow them to make manageable monthly payments. In some cases, some unsecured debt may be discharged when a when a chapter 13 repayment plan is completed.

Protecting Property Through Chapter 13 Bankruptcy

There are two ways chapter 13 bankruptcy can help people struggling with debt protect their property.

Keeping Non-Exempt Assets

When you file for chapter 7 bankruptcy, the bankruptcy trustee can take some property and sell it to help pay your creditors. This usually doesn’t happen, though. That’s  because certain types of property are exempt. That means the trustee can’t take them.

The exact exemptions differ from the state to state. But usually they include things like a certain amount of value in your home and car, clothing, furniture, and tools you need for work. Most types of employer sponsored retirement accounts are also exempt.

Sometimes people considering bankruptcy have assets that that are not exempt. For
example, imagine that you have $100,000 in equity in a $250,000 home.. But, your state only protects $50,000 in home equity. In that situation, you likely would not be able to pursue Chapter 7 and keep your house. But Chapter 13 works differently. You might be able to qualify for a Chapter 13 repayment plan that would allow you to keep your home.

Stopping Foreclosure and Repossession with Chapter 13

People also sometimes use Chapter 13 bankruptcy to stop mortgage foreclosure or repossession of an asset that serves as collateral for a loan. In most bankruptcy cases, an order called the automatic stay is entered as soon as you file your petition. That order tells creditors and debt collectors that they have to stop trying to get money from you for as long as the order stays in effect. So, for instance, if you are three months behind on your car payment and expecting your car to be repossessed any day, filing bankruptcy can usually prevent that. But, it’s not a long-term solution. If you file Chapter 7, you’ll have a short time-out, but then you’ll have to either pay up (though you may be able to pay less than you owe) or give back the car. In Chapter 13, you can keep the car and pay the past due amount over time through the plan.

How Do I Know Which Type of Bankruptcy is Best for Me?

The best way to determine whether you qualify for Chapter 7 and/or Chapter 13 bankruptcy and which will best serve your needs is to talk with an experienced local bankruptcy attorney about your options. Most bankruptcy attorneys offer free consultations

What is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is a form of consumer bankruptcy that allows an individual or married couple to wipe out much unsecured debt. That means obligations like credit card debt, old utility bills, payday loans, and medical bills.

Who Can File Chapter 7?

There are income limitations for Chapter 7 bankruptcy, designed to ensure that people who file Chapter 7 and discharge their debts really need the relief. But, most people who want to file for Chapter 7 can. That’s because people who earn less than the median income–based on their state and household size–don’t have to go on to the more complicated analysis to determine eligibility.

Even if you earn above the median, you may be able to file under Chapter 7. This is determined by comparing your debts with your income to determine whether or not you could afford to pay a certain percentage of your unsecured debts in a Chapter 13 plan.

However, not everyone who qualifies for Chapter 7 will want to file. Chapter 7 is sometimes called “liquidation bankruptcy,” because the Chapter 7 trustee can take non-exempt property and sell it to help pay off creditors. This doesn’t affect most Chapter 7 filers, because bankruptcy exemptions protect things like a certain amount of value in a home and car, work tools, household goods, and other necessities. But, exemptions vary from state to state, so it’s important to determine whether you have non-exempt property before pursuing a Chapter 7 case. If you do, you’ll have to decide whether you’re willing to surrender that property to resolve your debts and get a fresh start.

How Long Does Chapter 7 Take?

The typical Chapter 7 bankruptcy case takes four to five months, though it may take longer in certain cases, such as when:

  • The trustee needs additional information and you don’t return it promptly
  • The trustee or a creditor raises objections to some aspect of your case
  • There is property to be liquidated for the benefit of creditors
  • You don’t complete the required debtor education course in a timely manner

For most people, though, the completion of the case isn’t the most significant landmark. When you file for Chapter 7 bankruptcy, the judge will typically enter an automatic stay right away. The stay is a court order that tells creditors they can’t try to collect from you until the stay is lifted. So, collection calls, collection letters, eviction proceedings, wage garnishments, lawsuits, repossession, foreclosure, and other actions that may have kept your stress levels high are off the table–at least temporarily.

Is Chapter 7 the Right Answer for You?

Every situation is different. Chapter 7 bankruptcy can wipe the slate clean of unsecured debts, freeing up money for the things that matter most to you. But, it isn’t the right answer for everyone. If you’re struggling with debt and unsure of the best solution for you, your best next step would be to speak to an experienced local bankruptcy attorney. The attorney can assess your debts and income to determine whether you would likely qualify for Chapter 7, whether you have any property that might be at risk, and which debts you could likely eliminate.

Lost Your Credit Card?

It’s not you…it’s them.

If you were shocked to learn that one or more of your credit card accounts was closed without warning earlier this year, you’re not alone. Tens of millions of Americans lost credit card accounts or saw significant reductions in their credit limits during the spring and summer of 2020.

It’s not unusual for credit card issuers to close accounts or reduce available credit when the cardholder has a shaky payment history or is in delinquency or default. In some cases, people even see changes to their credit card accounts because of other activity on their credit reports, unrelated to the affected account. But, the 2020 shrinkage has been different.

If you received a notice that your credit card account had been closed, or that your credit limit had been reduced, chances are you didn’t do anything to trigger that action. About 50 million people lost credit in the spring, and another 70 million or so early this summer. If you were one of the many, don’t beat yourself up. With the economy uncertain, business closures and bankruptcies continuing, unemployment rates high and no end in sight to the Covid-19 pandemic, credit issuers are nervous. Shrinking and eliminating credit lines is one way to protect themselves against a rush of “borrowing” cardholders may be unable to repay.

After Credit Card Account Closure

If loss of access to credit has put you in a tough spot during these difficult times, call your card issuer. Chances of getting an account reopened or your credit limit raised again aren’t good, but your chances may depend on your history with the creditor.

If your account was closed, keep up payments–if you can. The fact that the account is closed doesn’t relieve you of the obligation to make payment under the terms of your original contract. You’ll generally still be subject to late fees, interest, and other penalties just as if the account were still open. That means falling behind on payments can be expensive, and may harm your credit.

Your credit may take a hit in the short term, anyway, because your credit utilization may increase–that’s the percentage of available credit that you’re currently using. If that happens, just keep doing your best to make payments on time and keep credit card balances low. And remember–tens of millions of other Americans are facing the same challenges.