Choosing Between Chapter 7 and Chapter 13
The current global financial crisis caught many Americans unprepared for a downturn of the scale that has happened. As a consequence, many Americans found themselves in a situation where their financial liabilities far outpaced their ability to keep up without access to easy credit. The tightening of the credit markets in response to the current crisis inevitably led to a radical increase in the number of bankruptcies filed in the United States.
Many people considering filing for bankruptcy think of the more traditional Chapter 7 bankruptcy procedure first. This typically involves the wholesale liquidation of the petitioners assets, although there are some items that are exempt. Most unsecured debts, like credit card debt and medical bills, are discharged. Today, the United States Trustee who oversees Chapter 7 bankruptcies also imposes a strict means test, which may deny Chapter 7 relief to persons with income such that the bankruptcy claim appears to be abusive.
However, there is an alternative to Chapter 7 bankruptcy available, Chapter 13 bankruptcy. Chapter 13 bankruptcy is also known as reorganization bankruptcy because it involves reorganizing the debtors finances in such a way as to allow eventual repayment. The Chapter 13 option is useful for people that have nonexempt assets that they wish to keep (assets that would be liquidated under Chapter 7) or people that have a predictable income and can technically pay off their debt if it is adequately restructured. Importantly, Chapter 13 also extends special protection to third parties that may be liable for debts, such as a co-signer or spouse. Unlike a Chapter 7 liquidation that discharges debt within a few months, Chapter 13 filings lead to the creation of a Chapter 13 reorganization plan that remains in effect for three to five years.
There are certain requirements to be met before filing for Chapter 13 reorganization. There are dollar restrictions on the amount of debt that can be restricted; more than $336,900 in unsecured debt or $1,010,650 in secured debt will disqualify a petitioner from filing a Chapter 13. The debtor must show that he or she will have a reliable income that will remain steady throughout the reorganization period. This income must be enough that once required living expenses are deducted there will be enough money to begin paying the debt down in a significant way.
One rather peculiar restriction strictly forbids stockbrokers and commodity brokers from receiving Chapter 13 relief even if it is solely for their personal finances. Other than these basic restrictions, Chapter 13 relief is available to most people.
Because the filing process for a Chapter 13 is so complicated, the filer needs the help of a professional to make sure paperwork is correct and complete. Because it is a bankruptcy a fee will generally be required up front before the professional accepts the job and it is important to begin the filing process before the situation is too dire. A Chapter 13 bankruptcy can be a good solution for professionals and others with a solid income; self-discipline is absolutely necessary to make the reorganization work the way it should.
Wendy Polisi is the founder of Credit Repair College and Finance the Dream. Credit Repair College empowers people to take control of their financial future by learning everything they need to know to repair credit on their own. For more information on free credit repair please visit them on the web. Finance the Dream offers rent to own houses throughout the United States.