Under what circumstances is Chapter 7 bankruptcy better than Chapter 13?

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Under what circumstances is Chapter 7 bankruptcy better than Chapter 13?

Chapter 7 is not often recommended by professionals as people tend to lose their valuable assets with this type of bankruptcy. However, there are many situations when Chapter 7 can be beneficial than Chapter 13. These benefits can be interpreted as reasons for opting for Chapter 7 over Chapter 13. To learn more about bankruptcy, Chapter 7, Chapter 13 and other Chapters log on to https://bankruptcy.recoverylawgroup.com/.

List of some benefits of Chapter 7

  • Less time-consuming- The process of applying for bankruptcy under Chapter 7 and receiving a court judgment is relatively quick. An average case could take 3-6 months from the day bankruptcy has been filed.
  • Absence of payment plans- Unlike Chapter 13, Chapter 7 does not carry most liabilities forward. This means there is no need for any payment plan in order to repay the creditors in the future.
  • A higher percentage of debts can be released- With some exception to some of the priority debts like student loans, child support, alimony, taxes, penalties, etc., most of the other debts are released when Chapter 7 bankruptcy is filed. In general Chapter 7 results in the highest percentage of debt release compared to other Chapters.
  • Protecting basic assets is a possibility- The common sentiment with respect to people filing Chapter 7 or considering Chapter 7 is that they won’t have any assets left. However, this is not true, there can be several arrangements made wherein many assets can be protected as well as some nonexempt assets also can be possessed. Under most circumstances, you can keep your basic essential assets including a home and a car.

What type of filers should consider Chapter 7 bankruptcy?

Chapter 7 is ideal for people with the following characteristics-

  • Own assets with a lower fair market value
  • Have a higher amount of unsecured loans like a credit card, medical bills or unsecured personal loans
  • Whose household income is less than the state median

The matching of household income with the state median is a basic eligibility criterion. If your household income is below the state median of similar household, you qualify for Chapter 7. Else, you would have to deduct your income with some standard deductions to know your net income less standard or basic expense deduction. If your income is still above the median, you might not qualify for Chapter 7.

Should you opt for Chapter 13?

Chapter 13 is the straight competitor to Chapter 7. People who have high priority loans which will not get discharged while filing for Chapter 7 bankruptcy, should consider Chapter 13. People who wish to keep all their assets without much complications should also consider Chapter 13. What are some of the key disadvantages of considering Chapter 13? The list can be found below-

  1. Time-consuming – Apart from the 3-6 months of processing time in the bankruptcy court, your payment plan might last for 5 years. This means you are not left off the hook for a very long period of time compared to Chapter 7, which is almost done and dusted in max 6 months of the time
  2. Disposable Income – Often there is a misunderstanding that, the payment plan does not fluctuate with the change in disposable income. However, if the disposable income increases, the payment plan changes to accommodate more debt. To sum it up, the increase in income directly reduces the amount of debt being released.
  3. Complicated payment plan and disposable income calculation – Arriving at the disposable income and forming a payment plan for the next 3-5 years that satisfies the bankruptcy trustee, as well as the lenders, can be a laborious work.
  4. Adhering to the payment plan – Adhering to the payment plan becomes extremely important for a Chapter 13 filer, as there is a risk of losing the assets used to secure the loan such as a car or even the home to foreclosure. Apart from being current with the payment plan, the filer has to be current with all the non-releasable debt like taxes, administrative fees, child support, etc. This can be tough.
  5. History does not support the cause well – Just how past records say 85% of Chapter 7 cases are no-asset cases, the trend is not very positive for Chapter 13. As records, 63% of Chapter 13 bankruptcy filers do not successfully execute their payment plan as determined at the time of filing. This creates a greater risk of foreclosure, asset detachment and zero release of debts.

The above were some of the negatives of Chapter 13 bankruptcy code. However, people with consistent and good income sources have managed to get better of the record presented by Chapter 13 historic filers. A lot has been discussed about disposable income. Let’s find the list of deductions allowed from your income to arrive at the disposable income-

  • Food and clothing as per the standard deduction allocated in the state
  • Housing and utilities as per the federal standard or state irrespective of actual costs
  • Transportation if the filer does not own a car or a bike or maintenance costs if the filer owns an automobile
  • Taxes
  • Involuntary deductions from salary
  • Life Insurance
  • Child support, family support, alimony, and similar court rulings
  • Healthcare cost as per the standard indicated by the state or federal standard
  • Certain education costs

Total income less the above deductions would help you arrive at the disposable income, which will be directly in full towards the debts owed for the next 3-5 years. If you are still confused about whether to opt for Chapter 7 bankruptcy  or Chapter 13 bankruptcy, connect with us at 888-297-6203 for the best advice and experienced solutions.