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Wednesday, January 16, 2013

What Should I file Chapter 7 or Chapter 13 Bankruptcy?

               An initial question that needs to be addressed when a consumer debtor wants to file bankruptcy is what Chapter they should file under. In practically all consumer cases Chapter 7 or Chapter 13 are the two options that may be available. Chapter 7 is usually the preferred alternative for debtors with significant unsecured debt. In Connecticut qualified debtors can file a Chapter 7 bankruptcy and have their discharge entered within sixty days of the 341 creditors meeting. This usually results in a discharge being entered less than four months from the date of filing. From that point forward the debtor’s credit will start to improve as long as they do not incur delinquent debt going forward. In most consumer cases debtors can retain their property in a Chapter 7 including even homeowners’ current with their mortgage payments by applying the appropriate exemption to said property.
Chapter 13 is a payment plan bankruptcy that is most commonly used by homeowners to save their homes from foreclosure. Homeowners who have had a disruption in their income or medical crisis causing them to default on their mortgage can file a three to five year payment plan to catch up on their mortgage and stop the loss of their home by foreclosure if they have sufficient income to fund a plan. Depending on the amount of non-exempt assets, if any, and the debtors' income and expenses a debtor may be required to pay from zero to one hundred percent of their unsecured creditors under their plan. For debtors with high unsecured debt who do not qualify for Chapter 7 due to the means test or possible asset issues Chapter 13 may be their only bankruptcy option. In their Chapter 13 they will usually be required to pay some or all of their unsecured debts over a five year period and the discharge of any debt is delayed until the completion of their plan. The Chapter 13 trustee’s goal is to maximize the recovery for creditors so the monthly plan payments may stretch the debtor’s budget thin for that five year period and it may require some belt tightening for the successful completion of their plan. Chapter 13 involves more work than a Chapter 7 and consequently the legal fees are higher. This does not mean Chapter 13 is not a good option for debtors. As indicated above it clearly serves the homeowners best who have suffered an interruption in their income and fallen behind on their mortgages allowing them stop foreclosure and catch up. For those with unsecured debt who do not qualify for Chapter 7 a Chapter 13 does provide an ordered plan to pay back this debt while stopping the accumulation of high penalty interest and late charges with the benefit of the bankruptcy stay preventing and stopping any collection litigation and any post judgment wage garnishments and bank executions. Any debt not paid through the plan is discharged including debts from unsecured creditors who fail to file proofs of claim by the court appointed deadline.  The key difference in the two Chapters is that Chapter 7 debtors’ fresh start will begin approximately four months from their filing date while Chapter 13 debtors are looking at a minimum of three years of plan payments before they can put their financial problems behind them.