Bankruptcy: Chapter 7 or Chapter 13?
Are you considering filing for bankruptcy?
According to the Encyclopedia of Business and Finance, bankruptcy law was created initially to …
enable persons inundated with debt to have a new beginning. It is also designed to permit individuals and business entities to have additional time to pay and compromise existing debts without liquidating all assets.
Filing for bankruptcy is a big step, and you should obtain professional advice before taking it.
Each year, millions of people file for bankruptcy hoping to create a clean financial slate. For some, it is a last-ditch effort to wipe out debts, but for others it can do more harm than good.
“It’s a horrendous mistake for people to have maybe $5,000 or $8,000 worth of credit card debt or a car note to file bankruptcy,” says Brooke Stephens, author of Talking Dollars and Making Sense: A Wealth-Building Guide for African-Americans (McGraw-Hill; $14.95). She says bankruptcy should be a last resort used “when you absolutely have no assets, no income, nothing on the horizon to resolve the problem.”
But before you determine whether your particular situation warrants filing bankruptcy, you should familiarize yourself with the different kinds.
There are two common types of bankruptcy. Under Chapter 7, a consumer’s assets are liquidated and the proceeds are given to a trustee who pays off as many debts as possible. Those debts that cannot be paid off are discharged. A Chapter 13 filing is more of a reorganization plan under which a consumer keeps assets such as property. Some assets are exempt, such as a 401(k) or a car, but it varies from state to state. A plan is drawn up for debts to be paid over a period of three to five years or less. Certain debts such as back taxes, student loans, alimony, and child support cannot be discharged.
Rod Griffin, public affairs manager for Experian credit agency, says many consumers don’t realize that a Chapter 7 bankruptcy will remain on a credit report for 10 years, while a Chapter 13 bankruptcy will stay for seven years. Even if your claim is rejected by the court, it will still appear on your credit report. Griffin says if a lender extends credit to someone who has filed for bankruptcy, his or her interest rates are generally much higher.
- Source: excerpted from Tamara E. Holmes, Chapter 7 or Chapter 13? What Filing for Bankruptcy Really Means, Black Enterprise, Vol. 35, Issue 7. Feb. 2005
Chapter 7, Chapter 11, and Chapter 13
These are the phrases you may be most familiar with when it comes to bankruptcy:
The Code is divided into a number of chapters, the most important of which are Chapter 7 (”Liquidation”), Chapter 11, (”Reorganization”), and Chapter 13, (”Adjustment of Debts of an Individual with Regular Income”). The remaining chapters concern definitions, case administration, a discussion of creditors’ claims, debtors’ duties, estate of the debtor, U.S. trustees, municipal indebtedness, and debts of farm families.
- Source:Encyclopedia of Business and Finance
Chapter 7
A Chapter 7 proceeding is “bankruptcy” as envisioned by most persons. The crux of such a proceeding is the collection and reduction to cash of all nonexempt assets owned by the debtor; the monies, to the extent available, are distributed to classes of creditors.
- Source:Encyclopedia of Business and Finance
Chapter 11
One of the goals of the Bankruptcy Act is to allow a business to continue to operate, if possible, in order to prevent the inevitable discharge of employees from a bankrupt firm. Accordingly, Congress permits either a voluntary petition or involuntary petition under this Chapter. The proceedings may be commenced, with certain exceptions, by an individual or business entity, such as a partnership or corporation.
- Source:Encyclopedia of Business and Finance
Chapter 13
A gainfully employed person may be inundated with debts that cannot be paid in full but may be paid if that person were extended additional time to pay. Accordingly, Congress created a Chapter 13 filing that permits such a debtor with unsecured debts of less than $269,250 and secured debts of less than $807,750 to voluntarily file a plan that provides for the submission of earnings to a trustee, the payment in full of all allowable claims unless a creditor agrees otherwise, and the classification of claims with the same treatment of all claims within each class. The plan may modify the rights of holders of secured claims except holders of a security interest in real property used as a principal residence by the debtor.
- Source:Encyclopedia of Business and Finance
