Based on the definition of bankruptcy from Oxford Languages, Bankruptcy is defined as, “the state of being completely lacking in a particular quality or value.” Interestingly when someone files bankruptcy it doesn’t necessarily mean that they completely lack a particular value or quality. Generally speaking, most of the consumers that file bankruptcy are individuals that are facing a financial hardship where they are unable to pay their debts. Furthermore, this could mean that the debt is too high or their income is too low, either way, they are in a hardship where they are unable to pay their debts.
In this article, I will go through
- What is Chapter 7 Bankruptcy?
- What is Chapter 13 Bankruptcy?
- Why You Should Learn About Chapter 7 and Chapter 13 Bankruptcy?
- Impact of Filing Bankruptcy
1. What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is considered liquidation bankruptcy. This is the process of wiping out most of your debt through the payment of a flat Chapter 7 filing fee and attorney fee. Filing a Chapter 7 bankruptcy is based on passing the Chapter 7 means test by falling below the income limit for Chapter 7 based on your state.
However, if you fail to pass the means test, you may still be able to qualify for bankruptcy but not Chapter 7 bankruptcy. To help you navigate this situation, consider working with a legal professional within your area. For example, suppose you’re planning to file for bankruptcy in Florida. In that case, contacting a Florida Chapter 7 Bankruptcy Lawyer or wherever you may be located may be an excellent idea. They can help you determine if you’re qualified. And if you are, they can guide you through the filing process to ensure a more favorable outcome.
On the other hand, if you’re filing for this type of bankruptcy, below are the potential benefits you can get aside from debt forgiveness:
- Relief from creditor harassment: By filing for bankruptcy, the judge handling the case will issue an order implementing a stay on the creditors. This means that while the case is pending, the creditors aren’t allowed to contact you and repossess your property. If they never stop calling, a Chapter 7 bankruptcy can end their harassment.
- Rebuild your credit rating: Generally, Chapter 7 bankruptcy may damage your credit score. It may also help you to slowly rebuild your credit score and get your finances back on track.
Cost to File Chapter 7 Bankruptcy
One of the most common questions is how much does bankruptcy cost. How is one able to afford bankruptcy when they are unable to afford their utility bill.
The cost to file bankruptcy depends on many different factors such as the state you live in and the chapter you decide to file. You can find bankruptcy lawyer fees as low as $600 and as high as $1,800. The filing fee for a Chapter 7 bankruptcy is generally around $300 – $350.
Often, bankruptcy attorneys also take payments plans to help cover the cost before filing bankruptcy. In 2020 and 2021, many attorneys are now offering $0 down payment options. Please understand that the cost may be higher when aggregating the payments as the attorneys do take some risk of nonpayment.
Protecting Your Assets in a Chapter 7 Bankruptcy
You can run the risk of losing your assets through a Chapter 7 bankruptcy, which is why it is important to learn about Chapter 7 bankruptcy and the impact it may have. In almost every state there are state-specific bankruptcy exemptions that allow you to protect your assets under an equity limit.
Bankruptcy Homestead Exemption
Just as it is important to protect your car through bankruptcy, you may want to see if you could be losing your home through Chapter 7. You can take a look at the bankruptcy homestead exemption to understand the potential risk of losing your home. If your home appears to exceed your state or federal bankruptcy homestead exemption, you may want to consider Chapter 13 bankruptcy.
2. What is Chapter 13 Bankruptcy?
The wage earners bankruptcy, Chapter 13 bankruptcy, is the process of restructuring your existing unsecured and secured debt into a repayment plan. The Chapter Bankruptcy 13 repayment plan generally will last either 3 or 5 years. If you fall below the median income guideline you will most likely be put on a 3-year repayment plan while if you are above the guideline, you may be placed in a 5-year plan. Many people wonder whether Chapter 13 is worth it due to the cost and length of time.
Hence, if you’re filing for Chapter 13 bankruptcy, the following are some benefits you may want to consider:
- Help create a structured payment plan: With Chapter 13 bankruptcy, you’ll have the opportunity to restructure your payment plan, allowing you to pay your debts over a certain period of time.
- Prevent home foreclosure: Filing for Chapter 13 bankruptcy can put an automatic stay on the foreclosure process. It can provide you more time to devise a payment plan to pay back the missed repayments and avoid home foreclosure.
Chapter 13 Bankruptcy Plan Payment Example
Whether you are put on a 3 or 5-year plan, the expenses included should all be quite similar. Here is a Chapter 13 Payment Plan Example:
I touched on bankruptcy exemptions earlier in the article, it is also important to understand how the equity you have in your home may affect your Chapter 13 monthly plan payment. For instance, if your state’s homestead exemption is $50,000 and you have $100,000 in equity with $100,000 of unsecured debt. You may have to $50,000 over the 5 years to cover the amount of equity exceeding the homestead exemption.
You can estimate qualification by taking a Chapter 13 bankruptcy means test calculator or speaking with a local bankruptcy attorney. Many would say Chapter 7 is more affordable than Chapter 13 bankruptcy, often due to bankruptcy attorney fees, trustee fees, and the potential amount you pay back.
3. Why You Should Learn About Chapter 7 and Chapter 13 Bankruptcy?
According to the US bankruptcy courts, there were 774,940 bankruptcy cases in 2019, and 544,463 in 2020. There was a decrease of 29.7 percent during the time of the pandemic. The reason I bring this up is that it is quite clear that there are a lot of folks still filing bankruptcy regardless of the circumstances. With that being said, understanding Chapter 7 and Chapter 13 bankruptcy can be crucial.
Whether you are in a place of hardship and are worried about what your options are to get out of debt or you are more so curious about the bankruptcy processes, understanding Chapter 7 and Chapter 13 bankruptcy is extremely important.
4. Impact of Filing Bankruptcy
When it comes to filing bankruptcy, the impact of bankruptcy is one of the main concerns of the filers. Both Chapter 7 and Chapter 13 bankruptcy have slightly different impacts. First, let’s dive into the impacts of Chapter 7 bankruptcy.
The impact from Filing Chapter 7 Bankruptcy
A Chapter 7 bankruptcy takes around 120 days to be discharged, at that point, you are able to immediately start rebuilding your credit. One negative impact of filing a Chapter 7 is that you will have Chapter 7 bankruptcy on your credit report for 10 years. If you are an individual that is looking to apply for loans in the future, that is one factor to consider when making the decision to file a Chapter 7 bankruptcy.
If you are looking at buying a house after Chapter 7 bankruptcy, you should take a look at the estimated timelines for buying a home after bankruptcy below:
- Conventional loan – 4 years from discharge date
- FHA and VA loans – 2 years from discharge date
- USDA/Rural Housing – 3 years from discharge date
Impact from Filing Chapter 13 Bankruptcy
Similar to a Chapter 7 bankruptcy, you will see Chapter 13 bankruptcy on your credit report after discharge. The one difference is that Chapter 13 remains on your credit report for 7 years compared to Chapter 7’s 10-year timeline.
While you are in a Chapter 13 bankruptcy, you are generally not allowed to accrue any debt during the 3 or 5-year plan. However, there are times when you can get approval, but those are generally rare circumstances. I would recommend speaking with a local bankruptcy attorney if you are concerned about filing a Chapter 13 bankruptcy.
Filing bankruptcy can be a complex process and if you are someone considering filing, it could be helpful to understand Chapter 7 and Chapter 13 bankruptcy. Given the fact that bankruptcy may be a complex topic, it is important to understand the different types of bankruptcy and the possible alternatives to bankruptcy. Both bankruptcies can provide the debt relief you are looking for, however, each route has its pros and cons. Understanding the pros and cons of Chapter 7 bankruptcy may be helpful for making your decision between Chapter 13 and Chapter 7 bankruptcy. After bankruptcy, you can consider setting up a budget to help work through life after bankruptcy successfully.
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