Bankruptcy-Chapter 13 Or Chapter 7
Below is a MRR and PLR article in category Finance -> subcategory Other.
Bankruptcy: Chapter 13 or Chapter 7?
Overview
Bankruptcy laws aim to provide individuals overwhelmed with debt a chance to start anew. While bankruptcy filings are public records, they generally remain private unless specific circumstances arise. Credit bureaus will list a bankruptcy on your credit report for 10 years, impacting financial opportunities.
Common Reasons for Bankruptcy
People often file for bankruptcy due to:
- Unemployment
- Significant medical bills
- Overextended credit
- Marital issues
- Other unexpected large expenses
Filing for Bankruptcy
Two main paths exist for filing bankruptcy:
1. Voluntary Petition: The most common method where an individual requests the court to declare bankruptcy.
2. Involuntary Petition: Creditors request the court to declare a person bankrupt, usually to recover unpaid debts.
In both cases, a Bankruptcy Trustee manages the process.
Types of Bankruptcy
Chapter 7 - Liquidation Bankruptcy
Also known as "straight bankruptcy," this involves liquidating non-exempt assets to pay creditors. Typically completed in about four months, it suits those with minimal assets. A debtor can refile after eight years from a previous Chapter 7 discharge.
Chapter 13 - Reorganization Bankruptcy
This option lets individuals repay debts over 3 to 5 years, suitable for those with regular income and non-exempt assets they wish to keep. The 2005 Bankruptcy Law requires those who can repay some of their debts to file under Chapter 13 unless they meet strict criteria for Chapter 7.
Understanding the New Bankruptcy Law
Effective October 17, 2005, the law mandates:
- A Financial Counseling Course within six months of filing.
- Income assessment: If 60 times the net income (monthly income minus expenses) is $6,000 or less, Chapter 7 is possible unless unsecured debts are over 25%. Higher figures require Chapter 13.
Creditor Restrictions
Once filed, creditors must cease harassment, including lawsuits and wage garnishments. Secured creditors can request to lift the stay if payments aren't made.
Impact on Spouses
A spouse is not affected by a partner’s bankruptcy if not responsible for the debt. In community property states, either spouse can incur debts binding both, except for certain exceptions like real estate.
Credit and Bankruptcy
Post-bankruptcy, credit access is not entirely cut off. Some credit card companies may cancel cards related to the bankruptcy. Secured credit cards are an option where a deposit secures credit and builds trust over time.
Rebuilding After Bankruptcy
Two years post-discharge, debtors may qualify for mortgage loans comparable to those with similar financial profiles without a bankruptcy history. Stability in income and a significant down payment can mitigate the impact of bankruptcy on credit.
Asset Protection
Debtors can keep certain assets through exemptions. A homestead cap of $125,000 may apply based on ownership duration and other conditions. Legal residency affects exemption eligibility, and federal exemptions are possible in certain situations.
Special Considerations for Chapter 7
Tax debts can be discharged under specific conditions, including no IRS liens and compliance with filing deadlines. Student loans, however, generally remain unless proven as undue hardship.
Legal Assistance
While hiring a lawyer isn't mandatory, it is advisable due to the complexities of bankruptcy law. Professional guidance, costing around $1,600 to $2,000, generally provides significant benefits and peace of mind.
Conclusion
Selecting Chapter 7 or Chapter 13 bankruptcy is a critical decision influenced by one's financial situation and future goals. Evaluating each type's implications helps achieve a successful financial reset.
You can find the original non-AI version of this article here: Bankruptcy-Chapter 13 Or Chapter 7 .
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