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Bankruptcy is a means for consumers and businesses to either eliminate or repay their existing debt. This procedure, protected and overseen by the US Federal Bankruptcy court is broken down into several different types, with the most common for individual consumers being Chapter 7 and Chapter 13.
Chapter 7 versus Chapter 13
Chapter 7 Bankruptcy is considered a liquidation of debt and requires that the individual sell property in order to pay back lenders; however, certain types of property are exempt from being sold, including primary housing, vehicles that meet a value threshold, and family heirlooms. Exemption laws change regularly, Attorney Armen Sefyan can go through your assets and provide an overview of your specific case.
Chapter 13 Bankruptcy allows consumers to retain rights to all of their property with repayment of the debt is broken down into monthly payments lasting up to five years. Depending on the specific circumstances, consumers may be required to pay back a portion of or all of the debt.
A consultation with a chapter 7 and Chapter 13 attorney is the best way to determine if you’re eligible. As a general rule, individuals who have not filed for Chapter 7 in the last eight years and whose monthly income after living expenses is less than $166 may be eligible to file. Filing for Chapter 13 would apply to those with who have not filed in the last eight years and whose monthly income is greater than $166.
There are certain debts that cannot be written off no matter what type of Bankruptcy you file. These include:
- Anything not listed in the Bankruptcy paperwork
- Tax debt
- Alimony, including attorney fees
- Child support, including attorney fees
- Student loans
- DUI charges that resulted in a judgment for personal injury
- Tax-advantage retirement plan debts
- Homeowners association fees
- Fines assed by a court
In certain cases, debt may be considered non-dischargeable if the creditor refuses to accept the bankruptcy. These include:
- Anything over $600 owed to a single creditor in which purchases were made within 90 days of filing for bankruptcy, and the items purchased are considered “luxury”
- Fraudulently obtained debt
- Debt that is the result of willful injury to another person or another person’s property
- Cash advantages that exceed $875 and were obtained within a 70 day period of filing for bankruptcy
Alternatives to Bankruptcy
Although Bankruptcy can be beneficial to many consumers, there are alternatives to consider. To avoid harassment from creditors, you can utilize resources available through the federal government or the state of California to stop debt collection practices deemed abusive. Attorney Armen Sefyan can help you to determine if what you are experiencing is considered harassment under current debt collection laws.
To repay your debts, you can negotiate a plan with your creditors either on your own or via a debt consolidation and repayment plan. Credit counseling agencies are helpful for many people in this area; but be wary of the company you choose as dishonest credit agencies exist. During your consultation, Attorney Armen Sefyan can recommend companies that are best to work with.
1. I’ve Heard There’s a New Law That Will Make Filing Bankruptcy More Difficult. Is That True?
Yes. It is called the Bankruptcy Abuse Prevention and Consumer Protection Act and President Bush signed it in April 2005. The key to the new legislation is the so-called “means test,” which will determine whether potential Chapter 7 filers could afford to pay back their creditors under a Chapter 13 schedule. The problem is, the test will disqualify from Chapter 7 filing anyone whose income is higher than the median for the state (as determined by the IRS and Bureau of Labor Statistics) and who can afford to pay at least $6,000 or 25% of their unsecured debt (whichever is greater) over five years. This will affect many middle-income individuals or families who earn above their state’s median, but are forced into bankruptcy after accruing large debts, often because of divorce or medical emergencies. For details on the new bankruptcy rules, see our story.
The new law, which had been pushed for eight years by banks and credit card companies and was fiercely opposed by consumer advocates and bankruptcy attorneys, will go into effect in October 2005. Until then, the old rules — explained in the answers below — apply.
2. What’s the Difference Between Chapter 7 and Chapter 13 Bankruptcy?
If you file for Chapter 7 bankruptcy, most of your unsecured debts are written off within 90 days of filing. The bankruptcy will then stay on your credit report for 10 years. While debts will be forgiven, you may also have to give up some of your property, which may be sold, the proceeds of which will be distributed among your creditors. In most cases, this means you may lose your house (if you own it), as well as any expensive items such as art and jewelry, and pricey consumer electronics.
Chapter 13, on the other hand, is a repayment plan: You set up a three- or five-year schedule with your creditors. Chapter 13 bankruptcy remains on your credit report for seven years. With this type of bankruptcy, you get to keep all of your property, including your home, but need to show that your income will be enough to live on while you’re still paying down debts.
3. Is Chapter 7 Bankruptcy Right for Me?
You may be a candidate for Chapter 7 if after you pay for your basic monthly expenses you have no money left to pay off debts. Chapter 7 essentially wipes the slate clean, but you’d most likely lose any valuable possessions.
Bankruptcyaction.com, a bankruptcy information Web site, has a detailed list of exemptions by state.
4. When Does Chapter 13 Make Sense?
Chapter 13 is typically recommended for debtors who’ve fallen behind on their payments because of a temporary problem (such as a job loss), but can get back on track if given more time to catch up. After filing Chapter 13, a repayment schedule is established that eliminates all interest payments as part of the deal.
5. Under Chapter 7, Are There Any Restrictions on the Kind of Debts That Can Be Discharged?
Yes. Child-support and alimony payments, for example, are never dischargeable. Neither are past tax bills, even if paid by credit card. Student loans can be forgiven in very rare situations.
Creditors also have the right to object to the discharge of certain unsecured debts, such as large purchases or cash advances made within 60 days of filing.
6. Can I Choose Not to Discharge Certain Debts in Chapter 7, Like a Car Loan or Mortgage?
That depends on how much equity you already have in those properties. Theoretically, you can keep a debt obligation after bankruptcy by signing a reaffirmation agreement with your creditor. With such an agreement, you’re basically stating that you’ll continue to make payments on the debt, even after all your other debts are written off. So, for example, if a Chapter 7 filer wanted to keep a car, he would sign a reaffirmation agreement with his auto lender and continue to make the car payments during and after his bankruptcy.
7. What Happens to My Credit After Bankruptcy?
The most obvious thing that happens when you file for bankruptcy is that you get a notation on your credit report. Your credit score, which is the number creditors use evaluate your credit-worthiness, will also take a hit.
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