Filing for Bankruptcy – A Quick RunDown on Chapter 7 and Chapter 13 Bankruptcies

Research studies have shown that half of US bankruptcies were caused by Medical bills. The study estimates that medical bankruptcies affect about two million Americans annually. When most people think of bankruptcy they tend to think that it comes from acts of past irresponsible spending however it could happen to anyone.

Bankruptcy is a federal court process that places you under the protection of the bankruptcy court while you attempt to repay your debts ( Chapter 13 Bankruptcy ) or removes the debts altogether ( Chapter 7 bankruptcy ). In a bankruptcy, assets in excess of your allowed personal exemption, or non exempt assets such as, real estate, automobiles and boats will be liquidated by the trustee. When you file for bankruptcy, an automatic stay goes into effect. The stay prohibits your creditors from trying to collect any debt without the approval of the court.

Think long and hard before going into bankruptcy. Once you file, it will severely affect your ability to obtain credit, buy a house, buy life insurance and even get a job. There are other factors that might make one type of bankruptcy better for you than another.

Chapter 13 Bankruptcy – Reorganization. Chapter 13 bankruptcy, which applies to most people, involves reorganization of your debts. You’ll need to file a proposal with the bankruptcy court detailing your plan for repayment and include a detailed budget, which could be challenged by the court if the judge or a creditor feels you’ve added a lot of nonessential items. Some debts can be erased altogether, others must be partially repaid, and others must be repaid in full. If your proposal is accepted, your wages will most likely be garnished during the repayment period, which generally lasts three to six years. In Chapter 13 bankruptcy, you can prevent the loss of your home by immediately starting to make your regular mortgage payments and any catch up payments required by your repayment plan.

Is Chapter 13 bankruptcy for you?

Due to that fact that repayment of some of your debts is the basis for chapter 13 bankruptcy, you have to have regular income in order to qualify. Aside from employment or self-employment, regular income can include social security benefits, child care or alimony, and rental income. You also have to have enough disposable income after your basic needs like housing, utilities, and food to use for debt repayment. In addition, your secured debts ( those with collateral, like a car or a house) cannot exceed $872,000 and your unsecured debts ( those with no collateral, like credit card debt, student loans, and medical bills ) cannot exceed $270,000.

Chapter 7 Bankruptcy – Liquidation. In Chapter 7 Bankruptcy, you turn most of your personal property over to the court, which appoints a trustee to sell the property and use the proceeds to pay off all or some of your debts. As in Chapter 13 bankruptcy, you’re allowed to keep certain exempt property, but to keep secured property such as your house, car, or furniture you’re buying on credit, you have to sign a Reaffirmation Statement stating that you agree to be responsible for those debts. Once you’ve signed the Reaffirmation Statement, these debts can’t be discharged for at least six years. In other words, you can’t change your mind two – three years down the road and decide you don’t want those assets and don’t want to be responsible for paying for them.

Is Chapter 7 bankruptcy for you?

Chapter 7 is typically the bankruptcy type of choice for people who have large credit card or other unsecured debt and few assets. If there’s a risk that you might lose your home or car under Chapter 7, your lawyer may recommend that you file Chapter 13 instead. If you have more equity in your car or home than the exempt amount allowed by your state, the chance of being forced to relinquish these assets to be sold to pay your creditors is pretty high.

Filing for bankruptcy is not going to help you in the long run if you got there by irresponsible spending habits that you haven’t changed. However, if job loss, high medical bills, disability, death, divorce, or other circumstances not entirely in your control have produced the financial burden, bankruptcy may be the only way you can get a fresh start. The court will help place restrictions on how you can spend money and will not allow you to buy what it considers non essentials.

On Preventing Bankruptcies

Many bankruptcies can be avoided by practicing good money management. Some simple points listed below:

  • Avoid impulse spending.
  • Don’t use a credit card unless you have the cash to pay it off.
  • Tear up credit card offers you receive in mail.
  • Create and stick to a realistic budget.
  • Don’t buy a house or a car you can’t afford.
  • Protect yourself by having medical, homeowner’s and auto insurance.
  • Don’t make speculative or high risk investments.

If you do find yourself falling behind on your bills, call your creditors immediately. Most companies will work with you if certain circumstances (job loss, divorce, illness, etc.) have made it difficult for you to meet your financial responsibilities. Suggest a temporary reduction in your payment, a waiver of late fees or penalities, skipping several payments now and increasing future payments to make up for it, or skipping several payments and adding them to the end of the loan.

Leave a comment ?

14 Comments.

  1. Thank you for explaining the Reorganization (chapter 13). This post will be usefull to me for my project. Can I take a couple of paragraphs from it?

  2. Very nice information. Thanks for this.

  3. Very sad to hear that most banruptcies are caused by medical bills. I live in Canada, so the idea that you can go bankrupt because you are very ill is unimaginable.

  4. Make sure that bankruptcy is your best option. I see people planning on filing for bankruptcy when they only have $10k or $20k in debt. Generally, that is too low of an amount.

  5. I think part of your article is a bit confusing, the court won’t put restrictions on what you actually spend your money on, they will just only accept so much expenses in each category on the means test as an appropriate amount you SHOULD be spending based on averages of others living in your area with the same family size and income. You can spend more than that, but the court may not accept it as a reasonable expense and can therefore view that as disposable income and force you into a chapter 13 if they believe you can afford to pay part or all of your debts. Unfortunately the only way to help someone change their spending habits is by letting them learn it themselves, the government isn’t going to put you on a budget. Otherwise, great primer article!

  6. Great information about bankrupcy. I think this is the last resolution after no way to consolidate the bad debt. Very good information sharing!

  7. Nice info to teach us what is the difference between chapter 7 and chapter 13 bankruptcy. Thanks!

  8. Great advice; thanks for posting this :)

  9. Great post; thanks for sharing :)

  10. These are some very interesting facts and pieces of advice. It looks like you know your way around finance and consulting. Congratulations!

  11. Been reading for a few days now. This was very helpful and insightful information. BTW, I love your site design as well. I enjoyed reading it and hopefully you will write more soon. Do you have a newsletter? How do I subscribe to the blog itself?

  12. Very informative post. Very helpful, and well written. Its a shame bankruptcy is being turned to more often, because of the current economical state. Nice work.

  13. “Chapter 7 Bankruptcy – Liquidation” the points on this is very useful…..

  14. I am totally unaware about these facts like bankruptcy ,and its law clauses.OK.I have realized something about these facts.

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