Difference Between Chapter 7 and 13 Bankruptcy

 

Bankruptcy is the legally declared inability or impairment to repay ones debts. While individuals and organizations may become unable to pay their debts, only a court can rule that they are bankrupt, and reduce or eliminate their debts.

Bankruptcy Chapters

U.S. Bankruptcy Code (under Title 11) of the United States Code is divided into 6 chapters.

• Chapter 7: basic liquidation for individuals and businesses
• Chapter 9: municipal bankruptcy
• Chapter 11: rehabilitation or reorganization, used primarily by business debtors, but sometimes by individuals with substantial debts and assets
• Chapter 12: rehabilitation for family farmers and fishermen
• Chapter 13: rehabilitation with a payment plan for individuals with a regular source of income
• Chapter 15: ancillary and other international cases

"Chapters" essentially define liquidation for entities unable to pay their debts. A reorganization (Chapters 9, 11, 12, and 13) is when an entity doesn't liquidate but is restructured to be able to pay, and the new Chapter 15 created to handle foreign corporations with United States debts. Individuals are primarily concerned with Chapters 7 and 13, as Chapter 11 is rarely used by individuals unless they have extremely large amounts of assets, and Chapters 9, 12, and 15 are reserved for special entities.

Chapter 7 Bankruptcy

By filing Chapter 7 Bankruptcy, all non-protected assets of the individual (determined by state law) are liquidated by a U.S. Trustee and the proceeds are used to pay the creditors. After the creditors are paid whatever is received, the individual receives a Chapter 7 discharge, and the debts are considered released.

Under the The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, individuals cannot file for bankruptcy unless within 180 days prior the debtor received an "individual or group briefing" from a nonprofit budget and credit counseling agency approved by the United States trustee or bankruptcy administrator. Debt Insider works with non profit credit counseling agencies, who will help you pay off your debts if possible, or establish bankruptcy eligibility if not.

Chapter 13 Bankruptcy

Under chapter 13 the debtor (through their lawyer) will propose a plan to repay the creditors over 3 to 5 years. During this time, the creditors cannot attempt to collect their debt outside of this program. The plan will require all disposable income to be used to repay the debts, and at the end of the plan, the remaining money owed to the creditors is discharged.

While a Chapter 13 appears to be similar to a debt management plan with the required repayment, chapter 13 has the benefit of a discharge at the end but the drawback of higher payments and interest rates during the repayment. If your attempt at debt consolidation fails, you may have already significantly reduced your outstanding debts, making the resulting Chapter 7 or 13 bankruptcy less painful.

What Debt Solutions The Best?

 

Debt consolidation is a relatively broad term - it's a type of debt program that convert all your monthly unsecured debts into a single monthly payments. It often involves a credit counseling portion, where a credit counselor reviews your finances and help you determine which approach to managing your debt is right for you.

Generally, your options are personal bankruptcy (chapter 7 and chapter 13 most commonly), debt consolidation loans, debt management plans, debt settlement programs, or simple budgeting & repayment without a program.

Debt Consolidation Loans

Commonly advertised by credit card companies, a debt consolidation loan is a new line of credit that rolls all your other lines into it. While most people would get a higher rate to do this, by securing the loan with the equity in your home, one can get a more affordable interest rate, and the interest is often tax deductible as a home mortgage.

These loans may be interest-only home equity lines, or amortizing second (or first) mortgages, amortizing over 15, 20, 25, or 30 years. If your debts are from behavior that you have corrected, these loans are often the cheapest way to fully repay your debt without adverse effects on your credit score. However, if you get yourself back in debt, you have now "lost" your home equity and if you fail to make payments, your house can be foreclosed on.

Debt Management Plans

Commonly known as debt consolidation or consumer credit counseling, debt management plans are programs where the consumer enters the program and has a single payment to the debt management program. These programs are usually administered by non-profit companies, and the creditors have guidelines for negotiated rate decreases.

If you stay in the program, the simplicity of a single payment taken from your bank account via ACH, combined with the changes in interest rates and monthly payments, may help you get out of debt faster than on your own. However, if you drop out of the program early on, you will be ineligible for another opportunity for a year and you will be further behind because of the setup fees. This is much less risky than a debt consolidation loan, but adversely affects your credit.

These programs are good for people intending to reform their credit usage, but won't quite "bet the house" on it.

Debt Settlement Programs

If debt management doesn't work for you, your credit counselor may offer you debt settlement. With debt settlement you make a more affordable payment into the debt settlement program, and your creditors continue to assess fees.

Debt settlement programs work on the assumption that your creditors will eventually settle for the amount of money in the settlement account, because if they don't the other creditors will and they'll just be able to chase you into bankruptcy which they don't want. These programs often save you money, but leave your credit score badly damaged. If you can't afford a better option, these programs are the least costly up front.

Budgeting and Repayment

According to Todd Middleton who is head of content at 1-855-Jet-Debt, "if you aren't in awful financial shape your counselor will help you construct a budget that pays off your debts and live within your means".

The best time to choose one of the other programs is before you fall behind on your payments, but if you are handling your payments but simply stressed out about them, you may be best off tightening your belt and increasing your monthly payments. This will make your short term cash flow more difficult, but you will quickly see your balances go down, and most credit card companies will change your rates if you are making timely payments.

If this option seems hopeless, it may be a good first step. You might be able to change your balances and make clean payments for 24 months, which would alter the rate that you would pay on a debt consolidation loan. You may also be able to change your monthly minimums enough that you will be able to enter a debt management plan at an easier to afford level, making those few years without credit cards less painful.

Bankruptcy

Most consumers who file bankruptcy do so under chapter 7, full discharge of debt, or chapter 13, a court ordered payment plan. Until the recent bankruptcy reform legislation, chapter 7, the full discharging of all debts was most popular. Under the new laws, debtors are means tested before being eligible for chapter 7, and otherwise are placed under chapter 13.

Debt Settlement FAQ - What You Should Know

  

For anyone living with a lot of debt, life can feeling overwhelming.

Even though things might seem great, you actually have a few options when it comes to debt relief and debt settlement. There's no over-night cure, but debt settlement is one of the most effective ways to get out of debt.

Here is what you should know:

How many credit cards should I have?

Depending on how financially responsible you are with spending, there's a lot of upside to having more than one credit card. There's no perfect number of credit cards you should have, although experts suggest carrying at least two cards, if only to build-up your credit score.

For instance, you may carry an unlimited cash back rewards card for everyday use, along with a travel rewards card for more activity-specific rewards. Some experts recommend that you diversify with multiple types of credit cards for the greatest saving potential.

When considering applying for more credit cards, keep the following in mind:

• Do not close old credit cards that you are not using. Having a longer credit history reflects well on your overall credit score. (There are exceptions, however, including if annual fees are no longer worth the effort.)
• Find cards with extra benefits. Many cards offer additional perks like auto collision insurance, roadside assistance and liability protection; look for these cards and determine which rewards you would use most often.
• Get cards that will reward you for the purchases you already make. If you spend a lot on groceries, a cash back card that gives you extra rewards for grocery purchases would be a wise investment.
• Keep track of your payment dates and annual fees. Having multiple cards can make it difficult to remember which card payments are due when; stay on top of your expenses and keep your spending within your budget.
• Don't go into credit card debt. Regardless of the number of credit cards you hold, make sure to pay off your entire balance in full each month. Credit card debt is a slippery slope.

Simply put, there is virtually no downside to having several credit cards at once, provided you can handle your balances responsibly and the annual fees are within your budget.

Charge cards usually have more perks and higher credit limits, but require a 700+ credit score.

When it comes to your credit score, the only factors that will be affected by applying for multiple credit cards are the number of hard inquiries on your credit report, and the average age of your accounts (both of which affect only a small portion of your FICO score).

In fact, having many credit cards raises your overall credit limit, and lowers your debt utilization ratio.

Debt Relief Options for Consumers

 

Credit Counseling vs. Debt Relief

Credit counseling is a good alternative to filing bankruptcy. It's designed to help consumers experiencing financial difficulties, and are unable to make their minimum payments.

Debt Consolidation is also a better alternative vs. bankruptcy. In this scenario you, or a third party re-negotiates your interest rates and monthly payments based on your credit score, income, and budget.

Debt relief advisors provide credit counseling for multiple types of debt:

• Credit card debt consolidation
• Unsecured debt consolidation
• Home mortgage payment
• Online credit counseling
• Business debt consolidation

A debt advisor will hopefully help you create a plan to become debt-free within five years.

Some consumers feel obligated to pay back the entire balance on unsecured debt (i.e. credit cards) even when under the most extreme crises. If you’re one of those people and want help regaining control over your finances, an unsecured debt consolidation may just give you the peace-of-mind you’re searching for.

Consumer Credit Counseling

Consumer Credit Counseling organizations act as an intermediary between you and your creditors. However, debt consolidation only reduces the interest rates and fees on your debts, not the balance themselves.

By reducing these fees and interest rates, getting out of debt is possible in about 4-5 years. However, you will end up paying the full amount plus and possibly some interest.

Debt consolidation usually requires a higher monthly payment, whereas  with most Debt Negotiation programs it likely won't be the case. 

When evaluating consumer credit counseling organizations, check to see if the organization is a for–profit or non-profit company.

Non–profit credit counseling organizations are sometimes funded by the credit card companies that you're making payments to. This can create a conflict of interest, so make sure that the credit counseling organization is NOT collecting fees from both you and your creditors.
 
Debt Consolidation is a good option for some people, particularly those who can afford a higher monthly payment.