Chapter 7 Bankruptcy has many advantages for those in debt. In this article, I will debunk many myths the media uses to exploit those who file. When Americans in debt are provided the choice of filing Chapter 7 (discharge/erase most debt) or Chapter 13 (3-5 year repayment plan), many debtors end up filing Chapter 7. However, a debtor must qualify by meeting an income limitation, and have limited assets. Not everyone will lose property such as their motor vehicle, which is a big misconception. This will depend on the equity of the vehicle, loan balance (if any), and the value of other assets. There is a certain amount of assets the law allows an individual to keep.
The debtor receives a “fresh start”.
The long-term goal of filing for bankruptcy is to give the debtor a new, fresh start. The phone will stop ringing once the petition is filed, and the creditors receive notice. Debtors can breath and finally relax while going through this life changing process. Though the debt isn’t eliminated until the actual discharge date, creditors cannot harass or attempt to collect any debt once the petition is filed. Keep in mind there are several debts not dischargeable under bankruptcy law, including: some student loans, child support, alimony, and some taxes.
The debtor keeps future income.
Property a debtor receives or will receive after filing for Chapter 7 is not included in the bankruptcy petition or estate. Although, property from a divorce, civil settlement, or inherited property a debtor acquires within 180 days after filing for Chapter 7 (not after discharge) will become part of the bankruptcy estate. The rules and regulations are a bit different when filing Chapter 13.
No maximum debt amounts.
Chapter 7 Bankruptcy laws and rules do not impose a limit on the amount of debt a filer may have. However, when filing Chapter 13 Bankruptcy, a debtor is ineligible and the court will request you to file under Chapter 7 if secured or unsecured debt exceeds debt limits.
No repayment plan under Chapter 7.
Once the Chapter 7 Bankruptcy Petition is filed you’re not required to pay creditors any money you owe them. The debtor is no longer responsible for repaying the debts after it’s discharged in Chapter 7. However, under Chapter 13 a repayment plan will be designed in a way to assist the debtor in repaying the debt within 3-5 years. The bankruptcy preparer will map out a payment plan and submit to the court for approval by the trustee. Once the repayment plan is paid in full, the Bankruptcy Court will issue a discharge of the bankruptcy.
The discharge of debts occurs quickly.
In a typical Chapter 7 case, the discharge of debt occurs within 60 – 90 days after the Creditors Meeting. In a Chapter 13 case it’s normally discharged within the same time frame, but after the repayment plan has been completed.
The Disadvantages of Chapter 13 Bankruptcy
Only individual debtors are eligible to file Chapter 13, not businesses.
Chapter 13 cannot be utilized if you’re a business owner, regardless of how small the business is. However, if you have incurred personal liability for business debts, you can file as an individual only. Companies looking to file bankruptcy should contact an attorney regarding a Chapter 11 petition.
The debtor must repay all creditors under Chapter 13.
A debtor who files Chapter 13 Bankruptcy is required to repay creditors using a 3-5 year repayment plan. Furthermore, the debtor must have sufficient income to pay creditors every month in addition to their future monthly bills. The payment plan consolidates the debt so the payments are manageable. The debtor must repay priority debts (such as taxes) and secured creditors in full, and repay unsecured creditors (credit card debt) in an amount equal to what those creditors would have received if the trustee had sold the debtor’s nonexempt property in a Chapter 7 Bankruptcy.