The ongoing coronavirus pandemic has placed many Americans in unprecedented positions of financial hardship. It should thus come as no surprise that many debtors are turning to drastic measures to seek relief. Before filing for Bankruptcy, read on to find out about what debtors need to know about the different types of bankruptcies and other options available to provide financial help.
Chapter 7 vs. Chapter 13
Chapter 7 and Chapter 13 are bankruptcies for ordinary Americans. The first is also known as liquidation. Chapter 7 requires less time to complete and is simpler to file. It wipes out most forms of general unsecured debts, but often requires selling off some property to pay back creditors. Chapter 7 works best for those who have few or no assets.
Chapter 13 is a little different. It allows debtors to keep all of their property, but it requires them to pay creditors the value of non-exempt property like cars or boats. It’s a good option for those who still have regular income but have fallen behind on house or car payments.
Exempt vs. Non-Exempt Property
Some types of property are considered exempt from seizure. Exempt property often includes a primary home, a vehicle used for commuting, reasonably necessary household goods, clothing, and appliances, pensions, trade tools, some types of jewelry, and public benefits. Non-exempt property often includes valuable collections, family heirlooms, cash and investments, second cars or homes, and expensive items that are not necessary for maintaining a reasonable standard of living or performing a trade.
The eligibility requirements for filing Chapter 7 are much more stringent than those required for filing Chapter 13. Filers must pass what’s known as a “means test.” This test will require submitting Forms 122A-1 and 122A-2 along with proof of income, assets, and debt. People can only file for Chapter 7 if their income is low enough to pass the means test, but those who have more eligible income may still be able to file for Chapter 13.
Credit Counselling Requirements
Credit counseling isn’t just a viable alternative to bankruptcies for some people. It’s a necessity for anyone who wants to file for Chapter 7 or Chapter 13. Future filers must sign up for and complete credit counseling through an approved agency. In most cases, filers whose petitions are approved will also have to undergo financial counseling following the ruling.
No Silver Bullet
Chapter 7 and Chapter 13 bankruptcies aren’t silver-bullet solutions. It takes time, and, somewhat paradoxically, money to file a successful petition. Chapter 7 bankruptcies often take up to six months to complete, and Chapter 13 filers can expect the process to take even longer. It’s common for Chapter 13 filers to still be dealing with the repercussions of their initial petitions up to five years down the line.
It’s also relevant to note that both Chapter 7 and Chapter 13 affect borrowers’ credit reports, making it more difficult and expensive to take out loans, and even impacting things like rental agreements and job searches. The black mark resulting from a successful Chapter 7 filing can last for ten years, while that associated with Chapter 7 stays on consumers’ credit reports for seven years.
The Bottom Line
Filing for either Chapter 7 or Chapter 13 is not a decision that should be taken lightly. Before making that final call, the debtor should consult a credit counsellor and a lawyer to discuss options.