When you are researching whether or not you should file for bankruptcy, you are inundated with confusing information and jargon you are likely unfamiliar with. To help you with this process, we have compiled and condensed some information you should know about the differences between Chapter 7 and Chapter 13 bankruptcies, and the pros and cons to them both.
Chapter 7 Bankruptcy is for individuals who have little property other than necessities, and their debt is so high they can no longer keep up with basic expenses. In order to qualify for this type of bankruptcy, you must take a “means test” to determine whether or not your income is low enough to take advantage of a Chapter 7, after applicable expenses. This process is relatively quick and may only take a few months, and by law, creditors are not allowed to contact you during this time or after your debts are discharged. After the paperwork is filed and you have obtained your “automatic stay,” creditors cannot garnish your wages, institute foreclosures, or repossess autos.
Chapter 13 is for individuals who have equity in a property that they would like to keep. These individuals often have regular income, but are behind on their payments because of debts. Chapter 13 Bankruptcy allows them to maintain their property while taking 3-5 years to pay back their debt obligations through a court-approved payment plan, rather than surrendering any property.
Filing for bankruptcy is an intimidating process, but don’t be discouraged. There are many benefits to filing for bankruptcy, the main one being the forgiveness of your debts, leaving you no longer responsible for them. Filing for bankruptcy stops all collections by creditors, including foreclosures, garnishments, and repossessions. If you happen to have filed your bankruptcy with the help of an attorney, they act as a shield between you and the creditors, handling all inquiries and communication. Most states allow you to exempt necessities such as your home and car, and while it will not get rid of your student loan debt, it will prevent the lenders from taking aggressive actions to collect.
There are a few cons of filing for bankruptcy you might need to consider. First, you lose your credit cards unless you pay them off before filing, and it may affect your ability to get a new mortgage. Bankruptcy will also stay on your credit report for 10 years, and its presence may make it difficult for you to purchase a home, buy a car, obtain life insurance, and possibly get a job. It is also important to note that not all debts are forgiven through bankruptcy. These debts include student loans, alimony, child support, and back taxes going back three years. Your name will be in court records and might appear in the newspaper.
For many, the pros far outweigh the cons of bankruptcy, so they would rather file for bankruptcy and start on the road to rebuilding their lives. If you would like assistance with your bankruptcy case, contact us or call us at (619) 595-1655 and we will do our best to assist you.
Please keep in mind the information and advice presented in this blog is not intended to be used as formal legal advice. Contact a tax professional for personalized tax advice pertaining to your specific situation. While we try and answer all parts of the question when we write our blogs, sometimes there may be some left unanswered. If you have any questions about your problems with the IRS, SBOE, FTB, or BOE, or tax law in general, call RJS Law at (619) 595-1655.