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Chapter 7 vs. Chapter 13 bankruptcy
Chapter 7 and Chapter 13 bankruptcies each have
a separate purpose and a number of relevant issues in deciding
which to file. An individual wanting to file bankruptcy should
see a qualified attorney before proceeding with the filing.
There are some steps that have to be taken regardless
of what type of bankruptcy is being filed, so let's begin
there. The Bankruptcy act which enacted new laws in 2005 has
forced individuals to do a number of things before filing.
First, they must have taken a credit counseling
course within six months prior to filing. The course must
be approved by the government to count for filing bankruptcy.
While some people may find this burdensome, particularly if
they have already taken a course for another reason outside
of the six month time frame, it is a rule that is in place
so that people can find out if there are other more beneficial
alternatives to filing bankruptcy.
If it is still decided that bankruptcy is necessary
after taking the credit counseling course, one must decide
what type of bankruptcy to file. Both categories of bankruptcy
will cost money and leave a scar on credit, but the key to
deciding is looking at the individual's situation. Both types
of bankruptcy will also put an automatic stay protecting the
debtor from creditors and from having property taken out from
under them.
However, there are a few things that a stay
may not always cover and creditors can occasionally ask for
stays to be removed. So check with your attorney about what
can be protected in your individual situation.
Due to the new laws, not everyone can file a
Chapter 7. Chapter 7 is what many people assume when they
think of bankruptcy, an avenue to completely wipe out debt
and give you a fresh start.
It is not necessarily 100% true that Chapter
7 will wipe out all debt, but it does give the consumer a
much lighter burden to bear. The problem is that only people
who have a small enough amount of disposable income can file
Chapter 7.
Disposable income is what is left over to spend
after all monthly expenses have been paid. The Internal Revenue
Service (IRS) is the organization that gets to decide what
things should cost, so just because you pay a certain dollar
amount, that doesn't mean the IRS will allow it.
Only individuals who have less than $100 a month
in disposable income by IRS standards can file Chapter 7.
And beyond that, a Chapter 7 will not stop foreclosure indefinitely.
Usually a lender will ask to have a foreclosure stay removed
as soon as it is possible to do so.
Chapter 13, on the other hand, will more likely
help a homeowner keep his/her home. While Chapter 13 requirements
are also stringent, requiring the debtor to make enough money
for regular payments and to keep up with payments, it will
usually protect a home from being foreclosed on if the consumer
works to make every payment.
Something homeowners need to be aware of is
that if they don't make their scheduled payments, they can
still put all of their property in jeopardy of being lost.
So Chapter 13 is likely the best choice for
someone facing a foreclosure, but each individual has a different
situation and the unique characteristics of the situation
should be considered before making a final decision.
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