Bankruptcy: Chapter 7 vs. Chapter 13
When you’re facing bankruptcy, it might seem that the end of the world is approaching, but it isn’t. In fact, bankruptcy can provide you with a way out of a financial predicament. And you’re not the only one that will be facing it.
According to Debt.org, in 2020, there were 544,463 bankruptcy filings: 70% Chapter 7 and 28% Chapter 13. Chapter 7 and Chapter 13 are two sections of the U.S. Bankruptcy Code outlining different ways of settling your debts. In this article, we compare them to help you decide which one might be right for you. But you must first consider if filing bankruptcy is a good option for you.
Is Bankruptcy The Right Choice for Me?
Bankruptcy may be necessary if your liabilities have accumulated so far that you’ll never be able to repay what you owe, given your current conditions. If it is your only alternative, however, filing for bankruptcy should never be the first option. Your credit can be severely damaged by bankruptcy, making it hard to get a car loan or find other financial services—let alone a job.
There are alternatives other than bankruptcy you should consider first.
Debt Settlement
If you declare personal bankruptcy, you risk not being paid part of what you owe to creditors. Because of this, they may be open to negotiating a reduced debt settlement. To them, receiving a payment is better than none.
Depending on the stipulations of your settlement, depending on how much you owe, you may be able to reduce your outstanding debt by as much as 50%. Repayment plans typically provide you with 2–3 years to pay off the rest of your debt. Your creditors will also stop any collection efforts, including calls from debt collectors.
You can get yourself a settlement or opt for a debt settlement business to deal with your debts. Choosing a company could simplify the negotiations, but it will charge a fee to accomplish this. Always do research before agreeing to the terms offered by a company.
To settle a debt, you should already be defaulting on your debts. Therefore, ceasing to make repayments to any of the loans you’re considering settling will help. Naturally, this won’t be a good decision for your credit score, and it won’t remain on your credit report for seven years, so you’ll have to report it on your income taxes.
Debt Consolidation
Another alternative to bankruptcy is to consolidate your debt into a single, more manageable payment. We advise you to borrow from the reputable, not-for-profit service to develop a payment strategy.
A debt consolidation service works with your creditors to reduce interest rates, waive fees, and determine a monthly payment amount you can afford. You make every payment to the credit counseling service, which distributes it among your creditors. You don’t have to handle your creditors directly, and they cease their collection efforts—including annoying calls.
Debt consolidation has a high positive but short-term impact on your credit rating.
Debt settlement and debt consolidation are not relevant to all types of debt. And it’s totally up to your creditors whether they will work with you this way; they’re within their rights to demand full payment. In this circumstance, bankruptcy could be your only remaining option.
How Do Bankruptcy 7 and 13 Work, and Am I Eligible?
A judge and court trustee review your assets and liabilities when you file a bankruptcy claim, investigating whether you’re eligible and what type of bankruptcy is right for you.
If you meet the criteria, the courts probably will discharge (forgive) your debts or restructure them.
Be aware, if you haven’t yet had a Chapter 7 bankruptcy discharged or if you have had a Chapter 13 bankruptcy dismissed in the previous 180 days as you violated a court order or your claim was found to be fraudulent, you are not entitled to file.
The Department of Justice requires you to complete a credit counseling course within 180 days of a bankruptcy filing. You must choose a U.S. Trustee-approved agency and be ready to submit the certificate of completion from the course.
After filing, you are required to go through a debtor education class with a registered rehabilitation school prior to being discharged of your debts.
Debt and the financial targets that must be met govern the differences of Chapter 7 and Chapter 13 bankruptcy. Let’s take a look.
What is Chapter 7 Bankruptcy?
Primarily, Chapter 7 Bankruptcy is intended to remove all unsecured debt (credit card debt, loan debt, medical bills) so you don’t need to pay them. Chapter 13 deals with restructuring your debts.
Chapter 7 is the most common kind of bankruptcy, aiming to discharge eligible debts. (Ineligible debts include tax debt, alimony or child support, and student loan debt.)
If Chapter 7 is in effect for you, your assets are liquidated (sold) and the proceeds go toward your debt. You may be wondering, “Will I lose my house if I file for Chapter 7?” According to Upsolve, a non-profit organization that helps low-income families file for bankruptcy at no charge, more than 95% of people filing for Chapter 7 bankruptcy keep their primary residence, car, and most of their household.
Filing Chapter 7 may also require you to contribute a means test that shows your income relative to that of the median resident in your area.
If you do, the court will issue an automatic stay. This prohibits creditors from taking collection actions against you. No more harassing phone calls or threatening letters. Collection actions are also prohibited once all your debt are destroyed.
Chapter 7 lets you keep more of your own future earnings. Creditors are not allowed to take any of your earnings for your debt after you file. Money or property you receive after filing typically won’t become part of your liquidated assets (with some exceptions).
Under Chapter 7 bankruptcy, your financial obligations are discharged quickly, and there aren’t any debt limits.
Chapter 7 will stay on your credit report for ten years, which may cause your credit score to plummet. Remember, however, that outstanding unpaid debt will also negatively impact it.
Chapter 7 will not necessarily shield anyone who co-signed for credit or loans with you. They cannot be subject to the automatic stay, so creditors may further contact them.
Finally, bankruptcy is a matter of public record, so anyone seeking that information can find it.
Chapter 13 Bankruptcy
If Chapter 7 is the most prevalent kind of bankruptcy and has a high success rate, why would you file Chapter 13 instead?
You most likely don’t qualify for Chapter 7 bankruptcy.
Chapter 13 is an option if you need both unsecured and secured debts. Remember that secured debts are not qualified for discharge under Chapter 7.
Chapter 13 transforms your numerous debts into more manageable, ongoing monthly installments. For up to 3–5 years, as long as you make your repayments, any remaining debt is paid off at the end of the term.
Chapter 13 is geared toward those who do not have income and can get some of the relief due to consolidated debts, even if they never completely clear them. You get exactly the same automatic stay protection from creditors, and you are not required to liquidate any of your assets. Unlike Chapter 7, any co-signers are equally protected by the automatic stay.
Chapter 13 of a bankruptcy will stop foreclosures and repossessions of property. Chapter 13 will let you catch up on late payments of your mortgage, car, or other debts. You still need to make your regular mortgage payment or car payment, though: the reorganization is for your outstanding debt only.
Your reorganization and repayment plan categorizes all of your debt and divides it into three different categories: priority, secured, and unsecured. Your spending plan will put as much money as you can toward your priority debts during the life of your repayment plan. Priority debt includes past due taxes and litigation fees, among others.
Secured debts are paid next. This could entail missed mortgage payments or car payments.
Unsecured debts, such as credit cards, are paid last. It is possible that your unsecured balance will not be paid in full by the end of your grace period, and any remaining amounts will be discharged.
Many Americans who file for Chapter 13 bankruptcy have some disadvantages.
Only individuals, not businesses, may file for Chapter 13. You can’t have unsecured debts of more than $394,725 and secured debts of over $1,184,200.
According to Upsolve, Chapter 13 bankruptcy has a 67% failure rate.
If your Chapter 13 repayment plan is approved, you should put all your disposable income toward your debts. Things could change a lot within five years, and you may find yourself unable to continue making the payments.
When you miss repaying your debts, your credit score could be in a bad state than where you started. The filing remains on your report, and you may now owe included fees to your attorney and court costs.
Your credit score could remain low for years after Chapter 7 bankruptcy, or you may lose your car or home if you file for Chapter 13 bankruptcy.
Bankruptcy can allow you to get out from under a mountain of debt and establish fresh financial footing, but it’s not something you ought to do lightly.
If your credit has taken a hit as a result of Chapter 7 and Chapter 13, there are legal ways to increase credit score after bankruptcy.
How Do I Repair My Credit After Bankruptcy
You may have benefited from a mandatory financial management course as part of your contract. Now, put your financial management knowledge to use with this. Create a realistic budget that allows for occasional expenses and more fun, ensuring you’re ready to stick to it.
Neglecting to pay for any outstanding debts will negatively impact your credit score.
Try to clear a small loan loan or obtain a new credit card. Showing reliability and being punctual in paying your bills and doing your monthly credit card payments increases your credit score significantly.
Ignoring payments posted to your credit file can lower your credit score. Make sure you always make payments in a timely manner.
Look over your credit report on a regular basis. Errors on your credit report will hurt you through no fault of your own. It’s not uncommon to discover inaccurate details, so double-check yourself. If you see something you’ve never seen before within your report, don’t hesitate to ask a credit repair specialist to help you remove it.
Maintain your debt to credit ratio low. Your credit score is partly determined by your ratio of existing debt to available credit. Using a lower percentage of your available credit is a favorable signal to potential lending institutions.
