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Chapter 13 Bankruptcy v Chapter 7 Overview
As a general rule, filing for Chapter 7 bankruptcy is a bad idea if you have little or no debt that would be discharged, and your only reason for filing is to buy some extra time in your house. You can't get another Chapter 7 discharge for eight years. It doesn't seem worth filing just to get a little extra time, maybe a couple of months, in your home. Also, the courts frown on filers using bankruptcy for tactical purposes.
In some instances, a bankruptcy trustee — an administrator who works with the bankruptcy courts to represent the debtor's estate — may sell nonexempt items, meaning belongings that are not protected during bankruptcy. Nonexempt items vary according to state law.
The biggest differences between Chapter 7 and Chapter 13 bankruptcy are what happens to your property and who qualifies financially.
Chapter 7 requires you to sell property that isn’t exempt to pay off your debts. Chapter 7 bankruptcy typically discharges your obligations and allows you to get on with your life much faster than Chapter 13, which gives you a chance to maintain your property. The tradeoff for Chapter 13 , completion of a court-ordered repayment plan, which can take three to five years.
Another issue to consider : Not everyone qualifies for Chapter 7 bankruptcy. In Chapter 7, you must either have a below-median level income for your state or pass a means test that examines income, expenses and family size to determine whether you could reasonably repay your debts. Those who fail this means test then may use Chapter 13.
Perks, Quirks, and Benefits of Chapter 13 Chapter 7
Chapter 13 Bankruptcy in a Foreclosure Avoidance
A Chapter 13 bankruptcy can help you keep your home if you're behind in mortgage payments. While a Chapter 7 can delay a foreclosure temporarily, it won't block it permanently because you can't make up the missed payments. You will repay debts, some in part and some in full, over three to five years as part of a repayment plan. You might be able to avoid foreclosure and remain in your home with this type of bankruptcy because you can repay any delinquent mortgage payments through the plan. Also, you will likely pay a fraction (or sometimes, none) of your unsecured debts during the plan period and possibly eliminate certain other debts , underwater mortgages, entirely when you complete your plan, freeing up money for your first mortgage. Even if you can't complete the plan, filing for Chapter 13 bankruptcy will give you at least several months before a foreclosure can be completed.
Chapter 7 Bankruptcy in a Foreclosure Avoidance
If you're behind in your mortgage payments, Chapter 7 bankruptcy provides temporary relief through the automatic stay, which halts foreclosure proceedings for a few months. Most consumers filing for bankruptcy opt for Chapter 7. Chapter 7 bankruptcy is faster and cheaper than Chapter 13. Chapter 7 bankruptcy discharges, or erases, eligible debts such as credit card bills, medical debt and personal loans. But other debts, such as student loans and taxes, typically are harder to get discharged. Chapter 7 doesn’t offer a route to get caught up on secured loan payments, such as a mortgage or auto loan, and it doesn’t protect those assets from foreclosure or repossession. It can also free up money by eliminating other debts. To keep your house in a Chapter 7 bankruptcy, you must be able to meet two requirements : Your payments must be current, and you must be able to protect all your home equity when filing. Also, the bank will probably attempt to have the stay lifted by filing a motion seeking permission from the court to continue with the foreclosure. Still, the foreclosure can be delayed for a while.
Getting a Loan Modification in Chapter 7 Bankruptcy
Getting a loan modification isn't guaranteed (or typical) in a Chapter 7 bankruptcy. So, if you need your loan modified to afford the payments (and perhaps bring the loan current), it's best to complete the process before filing for bankruptcy. A lawyer can advise you about the loan modification process and give you information about the most effective strategies for protecting your home.