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What's the Difference Between Chapter 7 and Chapter 13 Bankruptcy?



Chapter 7 offers immediate relief and an immediate fresh start. The day we file your Chapter 7 bankruptcy Petition all of your creditors have to stop pursuing you. So if someone is garnishing your wages, it stops immediately. If there is a Trustee's sale, meaning that there's a foreclosure that's going to happen on your house, it stops it immediately. None of your creditors can pursue you as far as calling you at work, sending you letters, calling you on your cell phone trying to collect the debt as soon as we file that Chapter 7. Also in Chapter 7, the case should be over and done with in less than a year. So, in less than a year, you're going to receive a discharge and the discharge works against your unsecured creditors. So, if you have credit card debts, repossession debts from a car, medical debts, broken leases, the discharge relieves your obligation to pay that so you get a permanent fresh start, and it comes quickly.

Chapter 13 takes a little bit longer. Usually there's a payment to the Trustee. You'll pay the unsecured creditors pennies on the dollar. The plan, the Chapter 13 plan, lasts anywhere from 36 months to 60 months and that's depending upon your income, and the discharge doesn't come until you successfully complete the plan. But many times, even for folks that have to file Chapter 13, there are huge advantages inside of it because a typical Chapter 13 plan has a payment to unsecured creditors to, let's say, 3%, 5%. So, if you've got $100,000 of unsecured debt, you pay 3% of it through the plan, and then the remainder of that is discharged at the end of the plan.

So usually 95% of the time, if a client is eligible for Chapter 7, we put them in Chapter 7 because it's quicker, it's easier. You can also recover more quickly from a Chapter 7 in terms of your credit. I tell my clients the day after you file Chapter 7 bankruptcy, the best way to start recovering your credit is to go get a credit card. Go to creditcards.com and apply for a credit card and then start using that card responsibly. If you have $1,000 limit on the card, charge $500 per month and pay $500 a month, and in three years you should have a 690 credit score. Recovering from a Chapter 13 takes longer. Usually the recovery process doesn't start until after the Chapter 13 plan is completed and, again, that's 36 to 60 months away.

So those are some differences between Chapter 7 and Chapter 13. There are some other issues connected to stripping a lien off of your second home and I am going to do a video on that, so look through the rest of these to hear about that. If you own a business, you may have to file Chapter 13 for that reason. We will do a short segment on that as well.

But the other thing to keep in mind is we have a free consultation. If you come in and talk to me, I'm going to explain all of your options to you, take as much time as you need to understand all of your options, I'll answer all of your questions, and when you leave that consultation, you will be in a position to make a really good decision on whether or not bankruptcy is right for you; and, if so, should you proceed with Chapter 7 or Chapter 13.

April 08, 2013 6:30 am