- What is the difference between Chapter 7 and Chapter 13 bankruptcy?
Chapter 7:
Chapter 7 is referred to as "liquidation" or "straight" bankruptcy. In some ways Chapter 7 is the quickest and simplest form of bankruptcy for many people. However, people who make a certain level of income are ineligible for Chapter 7. Additionally, Chapter 7 is often not a good solution for people who have valuable assets, such as a person who has inherited or paid off their home. Chapter 7 is best for dealing with unsecured creditors such as credit card and medical debt for low income individuals. The vast majority of Chapter 7 cases are "no asset", meaning there is nothing for the trustee to sell and pay unsecured creditors. In the state of Tennessee an individual gets to exempt $10,000 in personal property ($20,000 for a married couple), therefore most people keep whatever property they have after filing Chapter 7.
Chapter 13:
Chapter 13 is a reorganization bankruptcy. Chapter 13 is generally the better option for people who make too much money to qualify for Chapter 7 or they have a valuable asset such as a home with no mortgage or they have debts that can't be dealt with in Chapter 7 such as delinquent taxes or past due child support. Chapter 13 also helps in situations where people are behind on their mortgage or car payments, as long as they now have income and can afford to make monthly payments to the Chapter 13 trustee. Debtors always keep their property in Chapter 13, but the value of their property may influence how much they are required to pay back to creditors in the Chapter 13 plan. Often in Middle Tennessee, people in a Chapter 13 pay back around 20% to their unsecured creditors such as medical and credit card debt depending on their income and other factors (Depending on their level of income and the value of their property). This is still advantageous in most circumstances because once the Chapter 13 bankruptcy is filed, the creditors can no longer tack on additional interest, late fees and attorney fees and these debts are stretched out to where they are paid over three to five years. Additionally, once the Chapter 13 is filed, creditors can no longer contact you, file suit against you or take any other action to collect the debt. Often a married couple with a mortgage and and two car loans, for example, will pay no more per month through the Chapter 13 than they were paying just on their mortgage and two car payments before the bankruptcy was filed, while not having to worry about making additional payments for things like credit card and medical debt.
Generally, people who are employed make their Chapter 13 plan payments by payroll deduction from their paychecks. People who are retired or self employed generally make monthly payments directly to the Chapter 13 trustee, who takes the money received and distributes it to the creditors such as mortgage lenders, auto finance companies and other creditors.
2. How long will bankruptcy stay on my credit record?
Generally, bankruptcy will show up on your credit report for 10 years.
3. Will I ever be able to borrow money again after bankruptcy?
Home mortgage loans are generally available after the bankruptcy has been completed for two or three years, if the person otherwise qualifies. (They have enough income. They haven't gotten back into trouble with debt...They would otherwise qualify for a mortgage.) Many people start receiving offers for credit, such as higher interest car loans, immediately after filing for bankruptcy. Although the bankruptcy will be noted on your credit report for 10 years, it is up to the individual lender whether they will loan you money or not. Sometimes lenders would rather see that you have taken care of your debts through bankruptcy than to deal with someone who owes lots of money to different companies. The lender knows they are more likely to be paid back if you don't owe money to several different companies. Obviously, the best thing for your credit score would be for a rich uncle to pay off all of your debts, but most people who file for bankruptcy owe so much money to various creditors that there is no reasonable way for them to ever get caught up based on their income, especially when the creditors continue to tack on penalties, interest, court costs, etc.
4. Will I lose my property?
The vast majority of people who file for bankruptcy do not lose any property. During the initial consultation, we will go through a checklist of questions to see if there is any realistic possibility of losing any property to the trustee. It is important to tell me about all the property that you own up front. If there was the possibility of losing something to the Chapter 7 trustee, we would probably opt to file Chapter 13, assuming Chapter 13 would otherwise makes sense for you. State and Federal laws provide what are called "exemptions". For example, in Tennessee an individual can exempt $10,000 ($20,000 for married couple) in personal property. Personal property is generally everything but real estate. (Cash in the bank, a car that is paid off, furniture, etc.) There are other special exemptions for things like retirement accounts, tools you use at work, clothing, and so forth. There are also exemptions for the equity in your home. The amount of the exemption depends on martial status, whether you have children and your age. Sometimes people decide to surrender property, such as cars, if they can no longer afford to make the payment or the car is broken down or not worth much anymore. The bottom line is that unless you've failed to tell me about something you own, we're not going to file the bankruptcy without you knowing up front that you may lose a particular item and have decided to go forward anyway.
5. Can I just file bankruptcy on this one debt, and leave this other debt out?
This is a question which comes up often. The bankruptcy law requires you to list ALL of your debts...anyone in the world that you owe money to. You are not allowed to cherry pick which of your creditors will be included in the bankruptcy and which you will not. Bankruptcy is intended to help you reorganize your finances and get a "fresh start". Still owing money to some creditors at the conclusion of the bankruptcy will not help achieve this. Once your bankruptcy case is concluded, there is no prohibition on voluntarily paying back one of your creditors, such as a neighbor or a favorite dentist, but your debt to them will be legally discharged upon the successful conclusion of your bankruptcy case the same as any other creditor.
Additionally, the bankruptcy law prohibits you from making preferential payments to certain creditors in the months leading up to bankruptcy. This doesn't mean that you can't make your normal mortgage payment or car payment before bankruptcy, but you can't pay back a $3,000 loan to your brother or chose to pay off a signature loan to your favorite bank when you owe similar debts to credit card companies, hospitals, other banks, loan companies, etc. The trustee or one of the other creditors could file a motion with the bankruptcy court to get the money back from the person or company that you paid off and distribute it evenly among all of the creditors.