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Chapter 7 versus Chapter 13: Which is better for me?

If you are like many Florida residents, your debt situation may be getting out of hand. Between your mortgage payments, your credit card payments, your car payment and all the other monthly bills you must pay, you may not earn enough to cover everything. Consequently, you may be wondering if bankruptcy is the answer to your debt crisis, and if so, which type, Chapter 7 or Chapter 13, you should file.

While Chapter 7 accounts for approximately 71 percent of all bankruptcies filed in the U.S., both types of bankruptcy have their advantages and disadvantages. Which type is best for you depends on what you want to accomplish.

Chapter 7

In a Chapter 7 bankruptcy, you can discharge your consumer debt and most of your other debt as well. This gives you a reasonably quick fresh financial start. The filing requirement is that your income must be below the Florida median for a household of your size. In 2016 this median for a family of four was $63,196.

One of the major advantages of a Chapter 7 bankruptcy is its many exemptions that allow you to keep most of your assets. For instance, under the homestead exemption, you can exempt the entire equity value of your home if you have owned it for at least 1,125 days, which translates to a little over three years. Other exemptions include the following:

  • Personal property up to $1,000
  • Vehicle equity up to $1,000
  • Education, health and hurricane savings accounts
  • Your weekly wages up to $750 if you are the head of household
  • Social Security, workers’ compensation, unemployment, disability income and veterans benefits
  • The cash surrender value of your life insurance policies

If you have very little equity in your home and the homestead exemption does not benefit you that much, you can choose to exempt up to $4,000 of personal property instead.

The Chapter 7 automatic stay immediately stops your creditors from continuing to attempt to collect their debts. This means that your car cannot be repossessed, your wages cannot be garnished and creditors cannot harass you with incessant phone calls. If your mortgage company has already started foreclosure proceedings against you, Chapter 7 stops the foreclosure sale of your home at least for a while.

Chapter 13

Unlike a Chapter 7 bankruptcy, a Chapter 13 bankruptcy is a reorganization. In conjunction with your bankruptcy trustee, you propose a plan whereby you pay all or a good portion of your debt, often over a five-year period. You can propose to pay off less than you actually owe with interest-free payments. The bankruptcy court will look at your overall financial situation and your ability to pay according to this plan before approving it.

Like a Chapter 7, a Chapter 13 bankruptcy also has an automatic stay that stops your mortgage company from foreclosing on your home, your auto loan company from repossessing your vehicle, and your other creditors from harassing you by phone or otherwise. If you are upside down with regard to your home and/or vehicles; i.e., you owe more than your home or vehicles are worth, you may be able to reduce your overall debt.

Since a Chapter 13 bankruptcy lasts for up to five years, this extended time during which you make payments according to your plan gives you the opportunity to catch up on your mortgage payments and pay off other debts. Any of your remaining unsecured debts are discharged when you successfully complete your payment plan and your bankruptcy.

You should speak with an experienced, knowledgeable bankruptcy attorney before making any decisions. (S)he will be able to assess your current debt situation, answer all your questions and advise you on which type of bankruptcy, Chapter 7 or Chapter 13, is best for you.

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