What you need to know about Chapter 7 and Chapter 13 bankruptcy

No one wants to be in a situation where they have to file for bankruptcy. However, due to COVID-19, many find that they are unable to pay their debts. In 2020 alone, 544,463 Americans have filed for bankruptcy. If you find yourself in these circumstances, know that there are still opportunities for you.

U.S. law has six chapters for filing bankruptcy that can meet your needs and preferences. Check this guide if you need help determining and distinguishing between Chapter 7 and Chapter 13.

The benefits and risks of Chapter 7

Out of more than 500,000 Americans who filed for bankruptcy, 381,217 used Chapter 7. If you ask any of them, one of their main reasons for filing for Chapter 7 is probably its debt restructuring. With Chapter 7, the law no longer requires you to repay your debt. It gives debtors a sense of peace and security as collectors are limited in pursuing you. However, not all of your debt will be repaid.

Some things can not be excused, including alimony, child support and certain taxes. Chapter 7 still frees up some of the money you used to pay off your debt for a usable income for your daily needs.

Another reason why Chapter 7 is the most common choice is that the process is much faster than the other chapters. It only takes up to five months, making it the best option for those who want to get out of their situations quickly.

It also gives you the opportunity to get off to a fresh, debt-free start. Part of the deal, though, is that you start with a blank blackboard. It may sound good, but it also means you lose your assets. This varies depending on your state, but you should be prepared to lose your property or equity in some assets.

Bankruptcy petitions will appear on your credit reports for ten years. You may find a more challenging time to borrow, but it would be easier to rebuild yourself.

How do I know Chapter 7 is for me?

It would be best for your situation to apply for Chapter 7 if you have low income and unsecured debt. Filing for Chapter 7 involves passing an “intermediate test” where your ability to pay your debts is at stake. As mentioned above, one of the consequences of this chapter is also that you may lose your assets. But the risks are minimized if you only have unsecured debt. In other words, no collateral should be required for any of your debt obligations.

The benefits and risks of Chapter 13

Chapter 13 application is best for people with assets to lose. This stops any foreclosure. It also helps prevent your collectors from pursuing you for debt repayment. Chapter 13 works through a repayment plan that can last three to five years. This makes it ideal for fiddling with a stable income, but it is also a risk that you will have to bear for a while.

You will need to work harder on budgeting as losing your Chapter 13 status can result in loss of assets. Finally, unlike Chapter 7, this does not significantly affect your credit. It will still appear in your credit reports, but many creditors would be more receptive to it than the other chapters.

How do I know that Chapter 13 is something for me?

If your income is more than your state’s median income, then Chapter 13 is probably the way to go. In this situation, you would not be able to submit Chapter 7. This is ideal if you want to keep your assets and have a good, reliable source of income. However, it is important to note that it is highly recommended to hire a lawyer to help you apply for Chapter 13. Although you can apply for it yourself, many legal and financial results are best handled by a professional.

Work with a reputable lawyer

Whether you are applying for bankruptcy under Chapter 7 or 13, it is best to have a reliable and trustworthy legal advisor to help you. They may not clear your debt, but they can certainly help lobby for the best repayment terms for you.

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