Chapter 7 or Chapter 13, Which is Right for You?
Although few individuals actually want to file bankruptcy, there are situations when it is the best choice for dealing with overwhelming debt. That said, there are two main types of bankruptcy that cover most individuals: Chapter 7 and Chapter 13.
For Florida residents who simply want to eliminate their heavy debt burden without paying any of it back, Chapter 7 provides the most attractive choice. In a Chapter 7 bankruptcy you wipe out your debts and get a “Fresh Start”. It is a total liquidation of your assets and the person appointed by the bankruptcy court, the trustee, collects from you whatever assets of yours are not otherwise exempt and sells them to pay your creditors.
You may keep certain secured debts such as your car, your furniture or house by reaffirming those debts. To do so, you must sign a voluntary “Reaffirmation Agreement”. If you decide that you want to keep your house, your car and or your furniture, and you reaffirm the debt, you cannot bankrupt (or wipe-out) that debt again for eight years. You will still owe that debt and you must continue to pay it just as you were obligated to continue to pay it before you filed bankruptcy. It is important to note that in order to reaffirm the debt, you must also bring it current. In other words, if you are three or four months behind, then you must pay the back payments which are due in order to reaffirm it. You can select which debts you wish to reaffirm – you can state that you wish to keep the house and the furniture, but that you want the car and the jewelry to go back to the respective creditors.
Certain debts still cannot be discharged in a Chapter 7 bankruptcy, such as alimony, child support, fraudulent debts, certain taxes, student loans, and certain judgments. However, in most Chapter 7 cases, the debtor has large credit card debt and other unsecured bills (i.e. medical) and very few assets, therefore a Chapter 7 bankruptcy is able to completely eliminate all of these debts.
Advantages to a Florida Chapter 7 filing:
- You receive a complete fresh start. After the bankruptcy is discharged the only debts you owe will be for secured assets which you choose to sign a “Reaffirmation Agreement.”
- You have immediate protection against creditor’s collection efforts and wage garnishment on the date of filing.
- Wages you earn and property you acquire (except for inheritances) after the bankruptcy filing date are yours, not the creditors or bankruptcy court.
- There is no minimum amount of debt required.
- Your case is often over and completely discharged in about 3-6 months, after which you can immediately begin to rebuild your credit.
Disadvantages to a Florida Chapter 7 filing:
- You lose your non-exempt property which is sold by the trustee. If you want to keep a secured asset, such as a car or home, and it is not completely covered by your Florida bankruptcy exemptions then Chapter 7 is not an option for you.
- If facing foreclosure on your home, the automatic stay created by your Chapter 7 filing only serves as a temporary defense against foreclosure.
- Co-signors of a loan can be stuck with your debt unless they also file for bankruptcy protection.
- If you filed a prior case and received a discharge of your debts, you cannot file a second Chapter 7 bankruptcy case for another eight years after you filed the first case.
Alternatively, there are several situations where a Chapter 13 is preferable to a Chapter 7. For instance, a Chapter 13 bankruptcy is the only choice if you are behind on your mortgage or business payments and you want to keep your property, either in Florida or another state, at the end of the bankruptcy process. A chapter 13 bankruptcy allows you to make up the overdue payments over time and to reinstate the original mortgage agreement. In general, if you have valuable property not covered by the Florida bankruptcy exemptions that you want to keep, a chapter 13 filing is a better option. Also, people file Chapter 13 bankruptcy because they have too much income to file a Chapter 7 bankruptcy or have the kind of debt that is non-dischargeable in a Chapter 7 (e.g. certain taxes).
Advantages to a Florida Chapter 13 payment plan:
- If you choose and you can afford the payment plan, you can keep all your property, exempt and non-exempt.
- While debts are not eliminated as in a Chapter 7 discharge they can be reduced under a Chapter 13 payment plan.
- You have immediate protection against creditor’s collection efforts and wage garnishment.
- More debts are considered to be dischargeable (including debt you incurred on the basis of fraud and credit card charges for luxury items immediately prior to filing).
- If the Chapter 13 plan provides for full payment, any co-signers are immune from the creditor’s collections efforts.
- You have protection against foreclosure on your home by your lender as long as you meet the terms of the plan. There is also an opportunity to apply for modification of the terms of your mortgage.
- You have more time to pay debts that can’t be discharged under either chapter (like taxes or back child support).
- You can file a Chapter 13 at any time and can file repeatedly.
- You can separate your creditors by class where different classes of creditors receive different percentages of payment. This enables you to treat debts where there is a co-debtor involved on a different basis than debts incurred on your own.
Disadvantages to a Florida Chapter 13 payment plan:
- You create a payment plan where you use your post-bankruptcy income. This ties up your cash over the Chapter 13 plan period.
- Legal fees are higher since a Chapter 13 filing is more complex.
- Your plan and therefore your debt will last for three to five years.
- You are involved in the bankruptcy court process for the term of the three to five year plan and under the watchful eye of the bankruptcy court.
- Stockbrokers, and commodity brokers cannot file a Chapter 13 bankruptcy petition.
This is an overview of Chapter 7 and Chapter 13 bankruptcy. The bankruptcy process is paper intensive and can be confusing. A mistake could be costly and prevent you from filing again for a certain period of time. It is best to consult with a qualified bankruptcy attorney to discuss your situation.