Should I File for Chapter 7 or Chapter 13 Bankruptcy?

November 2016

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Arriving at the conclusion that you may need to file for bankruptcy is never easy, and the hesitancy is understandable. There's definitely a perceived societal stigma attached to bankruptcy, but when you take a step back from the perception and look at the situation objectively it likely isn't as bad as you may think.

Filing for bankruptcy isn't announced in the paper. No one is going to call up your friends, family and coworkers to tell them about your bankruptcy. Although it is a matter of public record, the only way someone would find out about it is if they took the time to dig through those records. Most people won't know you're going through the process unless you tell them you're filing.

There are no laws that require you to tell your employer that you filed for bankruptcy, and most employers require no such disclosure, even during the hiring process, unless they are in certain security or financial industries.

Even if you struggle with the stigma, when weighed against the benefits for your quality of life, it's likely you can accept a bit of self-consciousness.

Putting an End to the Creditor Harassment

You may be experiencing one or many of the following persecutions, all of which filing for bankruptcy will immediately remedy.

  • Calls from creditors, oftentimes when you're at work, trying to sleep or having dinner with your family
  • Garnishment of your wages, making it even more difficult to keep your head above water
  • Threats of foreclosure or even the beginnings of the eviction process
  • Lawsuits against you by creditors trying to collect on debts
  • Utilities threatening to cut you off for past-due payments
  • IRS efforts to collect past-due taxes

The law actually levies harsh consequences on creditors who continue pursuing debts after you've filed for bankruptcy. Federal law 11 U.S. Code § 362 - Automatic stay strictly prohibits creditors from knowingly harassing you further. Those debt collectors don't make a profit when they're fighting lawsuits from determined attorneys who want to hold them accountable for abusing their clients, so bankruptcy is generally a very effective way to stop the phone calls.1

The automatic stay also halts any foreclosure or eviction proceedings, prevents the utilities from cutting off your service and will immediately stop wage garnishment.

What Is Your Peace of Mind Worth?

Debt is overwhelmingly stressful. In fact, the Holmes-Rahe Stress Scale ranks many financial or debt-related life events as some of the most stressful experiences one can endure, including losing your job, unexpected and often expensive health issues, business readjustments, career changes and foreclosure.2

If you're experiencing even one of the above events, chances are your quality of life is going to improve if they stop. Some people, like families who suffer an unexpected medical issue, could potentially be experiencing all of these events at once.

It's hard to imagine just how overwhelming the situation can be, especially when the hole just gets deeper every month. Putting a stop to the descent may be one of the healthiest things you can do for your own mental stability, even if that means suffering some adverse credit consequences.

What's the Difference Between Chapter 7 and Chapter 13? Which Is Right for Me?

Chapter 7 bankruptcy is reserved for people who can pass the state's "means" test. This test is just an analysis of your income, size of your family and how it compares to the state's average. If you fall below a certain threshold you will be eligible for Chapter 7.

If your income is too high to qualify for Chapter 7 then you'll need to file for Chapter 13, although there are scenarios in which a person eligible for Chapter 7 may actually be better served by Chapter 13.

Chapter 7 is sometimes referred to as a "liquidation bankruptcy." That moniker is based on the process in which non-exempt assets will be sold, or liquidated, in order to pay back your creditors. The term liquidation scares a lot of people, but the more important qualifier is non-exempt. Most non-secured assets are non-exempt, and most of your possessions are likely non-secured.

A secured asset is something you're financing. Having a car loan or a mortgage makes those assets secured assets. That being said, even people who file for Chapter 7 may be able to maintain possession of these assets so long as they are up to date and continue making payments on them.

But many, if not the vast majority, of people who file for Chapter 7 are relieved to learn that all of their possessions fall into the non-exempt category. Once the Chapter 7 filing process has been completed all of your unsecured debt will be forgiven, except for certain types, such as student loans, some lawsuits or fines, such as those arising from a DUI and child support debts.

Chapter 13 is sometimes referred to as a "wage earners bankruptcy," because many people whose income makes them ineligible for Chapter 7 instead file for Chapter 13. In essence, Chapter 13 bankruptcy is a three- to five-year repayment plan drafted and administered by a court-appointed bankruptcy trustee.

The plan is designed to pay off your creditors at a rate that enables you to continue living your life without becoming destitute. It will be designed to ensure you are at least able to keep enough of your income to maintain your current or at least a similar quality of life while consolidating your debt to a degree where you're only making one payment to pay off all your debt, in addition to any continuing payments on secured debt such as your mortgage or a car loan.

Which chapter of bankruptcy is right for you is very dependent on your situation, and a bankruptcy attorney can help you understand your options and the benefits and drawbacks of each.

If you want to find freedom from the incessant, nagging stress that is debt, you owe it to yourself to schedule a consultation with Havner Law Firm. Our experienced attorneys are dedicated entirely to helping people like you, and would be happy to discuss your situation during a FREE initial consultation.

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