Filing for Chapter 7 bankruptcy when unsecured debt becomes overwhelming, is often the only feasible option. When an individual is paying the minimum on large credit card balances it will take years to reduce the principal. If that person either loses their job, or accrues huge medical bills, the situation becomes insurmountable. The debtor is left with two choices; filing for bankruptcy under Chapter 7 or Chapter 13. Which option is best?
First, it is wise to consult with a bankruptcy or debt relief attorney to see which path you qualify for. The size and scope of your debt will determine what you are eligible for.
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About Chapter 7 bankruptcy:
• Commonly used when the debtor has little personal property and no liquid assets.
• The person or couple has little money left over after paying only their basic living expenses.
• Most unsecured debts can be covered under Chapter 7 and can be fully discharged. One exception is student loans that are government backed.
• A person can keep their furniture, car and any other items that are necessary for a normal life. They may be able to keep their home or stay in it longer.
• It is a fast moving process and debts can be completely discharged after only a short period of time, usually only a couple of months.
• Creditors must cease communication during the time they are awaiting discharge. Harassing phone calls end.
Chapter 13
• A person has significant equity in their home and wishes to keep it.
• They are able to pay their living expenses but cannot keep up with the scheduled payments of their other debts.
• The debtor is allowed to keep their home and personal property while the debts are spread out and dispersed to creditors by a trustee or administrator.
• Generally the debts are allowed to be paid off over a three- to five-year period as directed and controlled by the appointed trustee.
• During the extended payback period, a single monthly payment is made to the trustee. During this period creditors are restricted from any communication with the debtor.
Both chapters 7 and 13 stay on a person's credit report for a period of seven to ten years. This may seem like a long time to carry around a negative mark on one's credit history; however, if you consider the alternative - that a person with a $25,000 credit card balance who is paying the minimum payments will take ten years or more to pay it down and will probably miss payments along the way - bankruptcy is not a bad way to go. The person who files either chapter has a fresh start. The Chapter 7 filer has an immediate reprieve and the Chapter 13 filer has a restructured payment plan, but both are able to start rebuilding their credit immediately.
With the available cash that is freed up, a savings account at a bank or credit union can be opened. Depositors can use the balance to take out a secured credit card with that institution. As long as they pay the entire balance on time every month, their good faith will be reported to the three credit reporting agencies; Trans Union, Equifax and Experian. This will begin to raise their FICO score. Other banks will take notice and credit offers will begin pouring in. The wise person will ignore them until they can get an unsecured line where they already bank.
For Chapter 7 or Chapter 13, an experienced bankruptcy lawyer can determine who is qualified, but the basic guidelines are:
• Chapter 7- A person or couple must qualify through a means test which determines their income to debt ratio. They must seek qualified credit counseling prior to filing.
• Chapter 13- An individual whose unsecured debts are less than $360,475.00 and secured debts less than $1,081,400.00 is qualified.
An attorney can help a person file for protection under either chapter of personal bankruptcy. Once filed, a debtor feels a new freedom that would not have been realized for many years, if ever, by the person struggling with mountains of unsecured debt.
Is Chapter 7 bankruptcy better than Chapter 13? Chapter 7 has immediate discharge while Chapter 13 is a debt restructuring. Chapter 13 has a very high failure rate due to lack of self discipline among filers. It appears that Chapter 7 is the best choice, if choosing is even an option, but let your attorney help you make the right choice. In some cases it might be neither with debt consolidation or settlement as the best option. That is why the credit counseling is required. In New Jersey debt settlement companies are required to be nonprofit organizations.
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