Bankruptcy Basics: What chapter should I file?

27 Apr Bankruptcy Basics: What chapter should I file?

Chapter 7 and Chapter 13 are the two types of bankruptcy that individuals or married couples usually file. Chapter 7 is sometimes called complete or total bankruptcy, or liquidation . Chapter 13 is sometimes called debt relief , individual reorganization or debt adjustment .

In a chapter 7, you file your petition, and within a few months (absent objections) you discharge your dischargeable debts. In a chapter 13, you file the petition, then begin making monthly payments to a trustee for 3 to 5 years. The trustee takes your payment and uses it to make payments out to creditors in the way that you designated in your chapter 13 plan.

Chapter 13 often works very well for people with certain situations. These include among others:

If you are behind on your mortgage payments and are facing foreclosure;

If you have a second mortgage and the value of the home is not enough to cover the first mortgage;

If you owe unpaid property taxes;

If you owe certain taxes to the federal or state government;

If you owe more on your vehicles than they are worth (subject to some limitations for some car loans incurred in the last 2 years);

If you would lose assets in a chapter 7 case because they are worth more than the exemptions allowed to protect them;

If your disposable income is greater than your living expenses (While this seems like a simple statement, applying the current bankruptcy law to determine your disposable income sometimes requires an in depth knowledge of the law and above average mathematical skills);

Chapter 7 is a very effective tool for discharging your unsecured debts absent the above listed reasons to consider a chapter 13.

Your bankruptcy will be listed on your credit report for 10 years for a chapter 7 and usually 7 years for a chapter 13. In both chapters, however, you can usually rebuild your credit long before the bankruptcy is no longer listed on your credit report.

I have found that within 2 years of filing chapter 7, and 1 year after the completion of a chapter 13, my clients have rebuilt their credit. Many former clients have purchased a home, with a bank mortgage, 2 years after filing a chapter 7. I have even had clients come to me 2 years after filing a chapter 7 with over $35,000 in new credit card debt. Of course this is not recommended, but it illustrates that there is the possibility of credit not too long after filing for bankruptcy.

Filing bankruptcy should never be done lightly. It is best if you consult with a professional who understands the bankruptcy law and how best to apply it to your unique circumstance.

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Peter Orville is a bankruptcy lawyer in Binghamton, located in the Southern Tier of New York. He is a member and New York co-chair of the National Association of Consumer Bankruptcy Attorneys.
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