Even seasoned lawyers have challenges understanding all the nuances of bankruptcy laws, especially since bankruptcy reform measures were enacted in 2005. There are a number of differences between Chapter 7 and Chapter 13 bankruptcies, and the debt solution that is ideal for one family may not work well for another family.
Basic Definitions
For any type of bankruptcy, you or an attorney must file formal paperwork with your local division of the United States Bankruptcy Court. Chapter 7 allows you to request permanent elimination of most of your pre-existing debts. On the other hand, Chapter 13 requests a partial debt repayment plan.
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Qualifying for Chapter 7 vs. Chapter 13
Unemployed people are poor candidates for Chapter 13, as a petitioner must have at least some disposable income to pledge toward debt repayment. On the other hand, some people earn too much money to receive Chapter 7 assistance. Generally, if you earn more than your state's annual average income you must get special permission to file Chapter 7.
Credit Considerations
The fact that you filed bankruptcy will damage your credit rating. Also, such filings are a permanent public record that any interested party could access in the future. A Chapter 7 case damages your credit score for 10 years, while a Chapter 13 filing harms your creditworthiness for 7 years.
Once a judge approves your Chapter 7 request, you can get new credit accounts but will likely pay higher interest rates. In Chapter 13, you cannot get any new accounts without a judge's permission while you're repaying debts under court supervision; it usually takes 3 to 5 years to finish a Chapter 13 plan.
Similarities
There are some similarities between Chapter 7 and Chapter 13 cases. You must complete a credit counseling session through a federally-approved agency before you can even ask for bankruptcy assistance. Also, you must complete a second credit counseling session before receiving a finalized or discharged bankruptcy case. The aim of this education requirement is to prevent future bankruptcy filings.
Also, some types of debts will not be eligible for any type of personal debt assistance. Tax bills incurred less than three years ago, court fines, child support, alimony, and bills charged right before filing bankruptcy are ineligible for a court-ordered reduction or liquidation. Count on fully repaying your government-backed student loans unless you can prove an extenuating circumstance such as a serious and permanent disability, your school closed, or you were allowed to attend college-level classes without a placement test or evidence of a high school equivalency diploma.
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