If you’re dealing with serious debt and are unable to keep up with repaying loans, credit card bills, or other balances, Chapter 7 and Chapter 13 bankruptcy are the two most common ways a person can eliminate or manage their debt.
Which program you go with depends on your situation and how you want to resolve your debts. It’s important to have a comprehensive understanding of both Chapter 13 and Chapter 7 before you make any decisions. Let’s take a look at the differences and factors you should consider when deciding how to file.
Liquidation vs. Reorganization
If you’re considering filing Chapter 7 or 13 bankruptcy, it’s important to understand how the two function differently. Chapter 7 bankruptcy involves liquidations, while Chapter 13 focuses on reorganization.
Liquidation involves taking inventory of the debts owed and requires the debtor to begin selling their assets to cover the balance that’s owed. Depending on the situation, this may be less than favorable because it can leave someone with very few assets. This is because it’s more likely that a person’s debts outweigh their assets. However, this is the only option available when someone would be unable to ever pay back their debts because of low income or other circumstances.
When it comes to resolving debts, reorganization is often preferred. If a person wants to keep their assets and is able to create a repayment plan, Chapter 13 filing is the way to go. With the guidance of the court, they will create a plan to resolve their debts without having to worry about liquifying their assets like their house or car.
When to File Chapter 7 Bankruptcy
If a person has little to no disposable income, Chapter 7 is an option to consider. To prove that you can’t afford to pay your debts, you must first pass a means test. In Maryland, if your income is below the Maryland median for your household size you are exempt from the test. If it’s higher, the means test determines if you can pay back a portion of your unsecured debts through a Chapter 13 filing.
When debt is discharged through Chapter 7, it means you are no longer responsible for paying the debt back. This means that debt collectors may no longer be able to collect money from you, contact you, garnish your wages, or start a lawsuit against you or your property. Because Chapter 7 focuses on liquidation, the entire process typically resolves over a matter of months.
In regard to potential consequences, when a person files Chapter 7 bankruptcy they may sustain asset losses. Essentially, anything that could be sold to pay back creditors may be liquified. In Maryland, however, personal property, motor vehicles, and wages are exempt. In addition to the loss of assets, filing Chapter 7 bankruptcy usually negatively impacts a person’s credit and stays on their report for up to ten years.
When to File Chapter 13 Bankruptcy
For someone with sufficient income, they may be required to file Chapter 13 if they’re considering bankruptcy. To qualify, a person needs to prove they can’t repay their debt but has an income that’s above Maryland’s median for their family size.
Filing Chapter 13 bankruptcy can stop the foreclosure process and give the debtor a chance to catch up on past-due mortgage payments. In addition to that, creditors cannot take any actions to try to collect money. Once the repayment plan is approved by the court, the debtor follows that schedule to take care of the money they owe.
While setting up a repayment plan can help pay off debts over time without worrying about collection agencies, it can put a strain on a family’s budget. And, unlike the relatively short process with Chapter 7, Chapter 13 bankruptcy typically takes three to five years to resolve. Fortunately, Chapter 13 is less likely to severely impact your credit and it only stays on the report for up to seven years. Some creditors may view a Chapter 13 bankruptcy as more favorable than a Chapter 7 because it indicates more debt was repaid.
Legal Advice from Belsky & Horowitz, LLC
Bankruptcy is a major legal decision and, as you can see, it comes with serious consequences. While the process can relieve you of your debts over time and ensure you have the opportunity to build up your finances in the future, it’s important to weigh the pros and cons and determine what’s best for your unique circumstances.
To properly consider all your options before you decide to file for bankruptcy, it’s best to speak with an experienced legal representative. While bankruptcy may be the path you choose, there’s a possibility there’s a better option for you. In order to get an idea of what your legal rights and options are when it comes to resolving your debts, a bankruptcy lawyer from Belsky & Horowitz, LLC can help. Contact us today to learn more.