All bankruptcies are not the same.
The main difference between a Chapter 7 and Chapter 13 bankruptcy is that one is a
“liquidation” bankruptcy (Ch. 7) and the other is a “reorganization” bankruptcy (Ch.13).
Within a Chapter 7 bankruptcy, you can discharge all your unsecured debt (unless there is some sort of priority: i.e. domestic support obligations, tax debt, student loan debt).
In a Chapter 13 bankruptcy, you pay back some/all of your unsecured debt at a reduced interest rate. If you are past due on your home loan or any other secured loan (car loan, furniture, etc.), you don’t have to give them up in a Chapter 13 bankruptcy. You will repay your arrears in the Chapter 13 Plan, interest free, and continue to make your direct payment.
As far as a timeline is concerned, a Chapter 7 bankruptcy is must faster. On average, a Chapter 7 bankruptcy will last around six months, from start to finish (depending on the complexity of your case).
Chapter 13 debtors typically follow a 60-month/five-year plan (unless they qualify to finish their plan in three years). Throughout the five-year plan, the debtor makes a monthly payment that is usually automatically deducted from his or her paycheck. Once the Chapter 13 plan is confirmed, there is usually no action required in the bankruptcy, unless issues arise.
Secured Loans in a Chapter 13 Bankruptcy
One of the perks of filing a Chapter 13 bankruptcy with secured loans, i.e., car loans, is that you are most likely going to lower your monthly payment. The interest rate is usually lower, and since you are stretching the amount due over the 60-month term of the plan, you could save a good amount per month. Also, your attorney will put your car note in the plan, so it is paid by payroll deduction, and you don’t have to worry about paying it directly. Once the term of the plan is over, you own your vehicles.
When it comes to your mortgage payment, you will still make direct payments, but any arrears you are paying in the plan are paid with no interest. That is preferable to a modification agreement made outside the bankruptcy, because the length of the term of your loan does not extend.
Secured Loans & Keeping Property in a Chapter 7 Bankruptcy:
Fining a Chapter 7 bankruptcy doesn’t mean you have to surrender all your property and be left with nothing. As long as you are up to date on your home or car loan, the creditor will typically allow the loan to continue, just as it was before the bankruptcy. Depending on the creditor, you may be required to complete a “Reaffirmation Agreement.” This enters you into another agreement to agree to the terms of the loan, and also waives the discharge of the debt in the bankruptcy.
In a Chapter 7, you may be required to repay the value of your non-exempt property back to the bankruptcy estate, where the trustee will evenly disburse the monies to your unsecured creditors.
There are two reasons not to let this deter you from filing a Chapter 7 bankruptcy:
1) Unless you have valuable non-exempt property (listed below), you are paying very little to unsecured creditors,
2) When you look at the big picture, you are discharging significant debt in exchange for a small payment. Also, the trustees allow you to make the payment of this amount in increments (usually over three months to make it affordable).
In a Chapter 13, the value of your non-exempt property makes up what is called your
liquidation value. The amount of your liquidation value dictates how much you must pay to unsecured creditors throughout the term of the plan. The reason why this is not going to be detrimental to your plan is because a debtor(s) will normally pay that amount over their 60-month plan, regardless. ($5000 over 60 months is only $83 a month.)
Examples of Non-Exempt Property: electronics, such as computers, stereos, televisions, DVD Players, jewelry, fine china, paintings, inheritance property, etc. (Remember, necessities like furniture and clothing are exempt, along with other items.)
Both a Chapter 7 and a Chapter 13 bankruptcy can give you a fresh start and help you regain your financial freedom. If you qualify, a Chapter 7 will allow you to eliminate any non-priority unsecured debt, such as medical bills, payday loans, credit card debt, and even leftover debt from repossessed vehicles or foreclosed homes. If you are about to lose your home or car, a Chapter 13 bankruptcy will allow you to save them and pay back any arrears with no interest. Your debt will be reorganized, and the plan will allow you to make the payments that are affordable to you.
Chapter 7 and Chapter 13 bankruptcies are feasible solutions to take back your life. Contact the Gouner Law Office for more information or to schedule your private consultation.
Written By: Alyssa L. Collara