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Is It Better to File Chapter 7 or 13?


The answer to this question normally depends on the type of debt. If you have an issue with unsecured debt, it’s better to file Chapter 7. Many people are in this boat. The average credit card holder owes about $4,000. If you have an issue with secured debt, it’s better to file Chapter 13. Legally, mortgage banks can usually accelerate loans (demand immediate repayment of the entire amount) after one missed payment. We’ll delve into some specific differences below.

The two main kinds of consumer bankruptcy also have many things in common. For example, the Automatic Stay applies in both Chapter 13 and Chapter 7. Once a Chicago bankruptcy lawyer files a voluntary petition, creditors cannot take any adverse action against the debtor. Furthermore, the same property exemptions usually apply. These exemptions typically protect all the debtor’s most important assets, such as houses, cars, and retirement accounts, from creditor seizure.

Chapter 7

Essentially, filing bankruptcy makes a statement about the debtor’s financial condition. Chapter 7 debtors basically tell judges that they cannot pay their debts, and they give the court permission to liquidate all their nonexempt assets to satisfy these debts. As mentioned, most people don’t have nonexempt assets, unless they own yachts, vacation homes, and other expensive luxury items.

The two biggest differences between Chapter 7 and Chapter 13 are the formal qualifications and the discharge order waiting period.

The means test applies to Chapter 7 debtors. Basically, the debtor’s income must be below the area average for that household size. Frankly, if the debtor’s income is substantially above average, Chapter 7 is probably a poor option anyway. Others, such as Chapter 13 and non-bankruptcy debt reduction negotiations, are available.

On a related note, the informal qualifications are different. Usually, if the debtor’s monthly income exceeds the debtor’s monthly expenses, the trustee (bankruptcy manager) asks unwanted questions.

Unless the trustee spots potential fraud issues or another red flag, the judge usually issues a discharge order in about six months. “Discharge” means the judge eliminates the legal obligation to repay a debt. Bankruptcy judges don’t have the power to address the collateral consequences of debt. For example, if State U holds Bill’s transcript because he owes tuition, the school may continue to do so, even if the judge discharges the debt.

Chapter 13

In contrast to a short Chapter 7, a Chapter 13 lasts three or five years. During that time, the debtor pays down delinquent secured debts, like past-due mortgage debt, and some delinquent priority unsecured debts, such as past-due student loans.

A Chicago bankruptcy lawyer can alter debt classification, perhaps from secured to regular secured, and save a debtor thousands of dollars a year.

The qualifications are different as well. Generally, the debtor must have sufficient monthly disposable income to make a monthly debt consolidation payment. If the debtor misses even one payment, the judge could dismiss the case.

Sometimes, attorneys combine these two kinds of bankruptcies into a continuous Chapter 20 bankruptcy.

We mentioned student loans above. Assume Max files Chapter 7 on his student loans, but he doesn’t qualify for discharge under the complex rules. Max could immediately file a Chapter 13 and extend the Automatic Stay for up to five years, giving him more time to catch up on a past-due loan.

 Connect With a Thorough Cook County Lawyer

No matter what kind of financial problem you are having, there’s a way out. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.



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