By the time you start thinking about bankruptcy you’re probably already in the midst of financial hardship. That kind of hardship can take a serious emotional toll, not to mention its effects on your self-esteem. All that means is that by the time you really need to be thinking about bankruptcy, it’s probably the worst time to try to make objective decisions.
If you’re feeling overwhelmed by debt, first take a moment to stop and remind yourself that your hardship is not a reflection of you, but of the circumstance you find yourself in. In fact, we’ve debunked several of the more common myths about bankruptcy here, including the myth that people who file bankruptcy are somehow irresponsible.
Now that you’ve had a chance to take a deep breath, start here by understanding the basics of Chapter 7 and Chapter 13 bankruptcy, one of which may be the best course of action to help you right your financial ship.
Remember, it’s always best to consult an attorney before you make a decision. Your attorney will understand the legal complexities and be able to guide you to the best possible outcome.
It’s Time To Consider Bankruptcy If…
The decision to file for bankruptcy can feel overwhelming itself. Here are some telltale signs that it might be time to consult your attorney…
If you’ve lost a job, been encumbered by medical expenses or gone through a stressful divorce, all of which can seriously impact your finances.
If you feel harassed by creditors to the point that you avoid answering the phone.
If the thought of your finances scares you, or you ignore the situation because you don’t want to deal with it.
If you use your credit card to pay for basic necessities like food.
If you aren’t even sure how much you owe and aren’t sure you want to.
If any of those sounds familiar, bankruptcy might not only be a good option, but it might be the best one to help you regroup and begin building up your financial stability again.
The Difference Between Chapter 7 And Chapter 13 Bankruptcy
There are a number of ways that Chapter 7 and 13 bankruptcy differ, and each has its nuances. Your situation will dictate which will most benefit you, but here are the general differences so you can begin to think about the direction that may work best for you.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is considered a “no asset” case. Debts are discharged without liquidation of assets, which means you can keep your home and car – unless you’re above your allowable exemptions. If you own a home and you’re above your allowable exemptions, your house will be sold to pay creditors and you’ll receive the money (if any) that is left over.
However, if you have a high mortgage balance in relation to the equity in your home, Chapter 7 is ideal for you, since your home won’t be sold to pay debts.
The other good news about Chapter 7 is that as soon as you file with the court, debtors are legally obligated to stop calling. That alone can be a tremendous burden lifted.
Chapter 13 Bankruptcy
One of the key advantages of Chapter 13 is a provision that allows for lien stripping. You can learn more about lien stripping here.
In short, this provision applies when you owe more on your mortgage than your home is worth – what you’ve probably heard referred to as “being under water”. In this scenario, your home won’t be able to be sold to pay debts and the debt that you owe on a second mortgage will be discharged.
Chapter 13 comes with its complexities, too. In some scenarios, debt is not discharged but rather restructured so that you can pay it back over time in a way that is reasonable under your financial circumstances.
In other cases, your debt may be discharged. For example, if you qualify for Chapter 7 but apply for Chapter 13 to take advantage of lien stripping or to obtain relief from DMV surcharges, your credit card debt will also be discharged.
Generally speaking, the process from filing through debt relief in Chapter 7 bankruptcy takes three months. Chapter 13 repayment plans span three to five years.
There is no income requirement for filing Chapter 13 bankruptcy, whereas Chapter 7 is a bit more complex. Whether or not you qualify for Chapter 7 will depend on your income, the size of your family, whether or not you’re married and the value of your assets.
Where income does come into play in Chapter 13 is in determining how much you can pay back each month and over what time period.
In either case, however, there is some debt that you cannot write off. That includes alimony, child support, criminal fines and student loan debt.
You can see why it’s important to consult an attorney. You’ll be able to share your situation and understand how exemption limits apply to you, how your equity will affect the best course of action and whether or not you can expect to have debt discharged or restructured.
When to File Chapter 7 Vs Chapter 13
Now that you have the basics, here are a few things to consider as you weigh your options.
If you have an asset with a significant amount of equity, such as a family home, car or other luxury possession that you want to keep, you may want to consider Chapter 13.
If your assets have little to no value, or if your debt exceeds your income or ability to pay it back, then Chapter 7 is preferable.
The lien stripping provision in Chapter 13 bankruptcy can help salvage an underwater property. It is especially beneficial if you have DMV surcharges or have lost your license to a DWI. In Chapter 13, these fees are discharged.
Perhaps one of the most overlooked considerations is whether or not you can pay for the bankruptcy itself. The reality is that there are attorney’s and court’s fees involved in the process. Attorney’s fees in Chapter 13 are higher since you will need your attorney involved throughout the duration of your repayment plan. Fees will ultimately depend on the length of the plan and the complexity of your case.
For Chapter 7 bankruptcy, your attorney will have a standard flat fee; however, it is payable prior to filing and cannot be part of your discharged debt. For some people in difficult financial situations, coming up with the fees can be a challenge in itself. In this case you may need to reach out to family or friends for temporary assistance in order to achieve long term relief.
Bankruptcy is not uncommon and it can often be the most effective path toward financial relief. Even though it affects your credit record, it also affords you the opportunity to begin to rebuild rather than risk collections or lawsuits.
If you’re feeling overwhelmed or even fearful of your current circumstances, reach out to us for a free consultation. We’re here to listen, offer legal guidance and help you get the best outcome for your situation.