Because of the long-term affects of up to ten years on a debtors credit report, bankruptcy should be used as a last resort. If bankruptcy is the only available option for personal debt reduction, is Chapter 7 or Chapter 13 a better option? This article looks at the different rules for filing personal bankruptcy.
What is a Chapter 7 Bankruptcy Discharge?
Chapter 7 is often referred to as straight bankruptcy because it can discharge all personal debt. Certain personal assets may be forfeited to help satisfy debt. Generally personal assets like certain home furnishings, vehicle used to travel to work and work related assets might be exempt from forfeiture. Retirement savings like a 401K or IRA are also exempt.
Congress passed legislation that makes it more difficult to file for a Chapter 7 discharge. Income limits have been established by state for a straight bankruptcy discharge. If personal income exceeds the established limits, Chapter 7 cannot be filed. The legislation passed by Congress also extended the amount of time between filings. Chapter 7 cannot be re-filed again until 8 years after the first filing.
What is a Chapter 13 Bankruptcy Discharge?
While Chapter 7 is designed to absolve all personal debt, Chapter 13 bankruptcy filing is more like a monthly installment plan. The court trustees establish a monthly payment amount and the money is distributed to pay off debts. The repayment plan is generally from a period of 3 to 5 years. Once the predetermined time expires, debts are considered satisfied, even if the debt paid is less than what’s owned.
Debtors that cannot file Chapter 7 due to income levels or other factors may still be able to file for Chapter 13 bankruptcy. This repayment type filing usually allows for the debtor to keep the majority of their assets. Chapter 13 bankruptcies also allows for shorter filing period between filings. In some cases it could be as short as 2 years between filings compared to the 8 years for Chapter 7.
Chapter 7 and Chapter 13 Filing Fees
Individuals can file for personal bankruptcy without the assistance of an attorney. Bankruptcy can be somewhat complicated and the advice of attorney is recommended. The following are the filing fees as of this year
- Chapter 7 filing fee $299
- Chapter 13 filing fee $274
The above amounts reflect the federal court fees; attorney fees are separate.
Bankruptcy is filed in federal courts and many of the rules are governed at the federal level. There is however some rules that are governed at the state level that may be different from state to state. A qualified bankruptcy attorney will look at the debtor’s financial situation and advise on the best course of action. Other options may include personal budget control, debt counseling services or debt consolidation.