Confused about Chapter 7

Hi rrihanna, and welcome to the site. I believe anyone can file a chapter 7 or 13, but there is so much more to it. Please list what state you are from, and then please click on the "free consultation" button that is just to the right of this post. They can point you in the right direction.

thanks,
Luke

rrihanna - Welcome to the site!

There are definite criteria for filing for either Chapter 7 or Chapter 13. The bankruptcy laws changed a few years ago, and made it much tougher to just wipe your debts out with a Chapter 7 without any loss of assets.

Chapter 7 will wipe out almost all of your debts (there are still some debts that cannot be eliminated, like certain tax debts, child support, and student loans). However, you must allow an attorney to perform the Means Test on your income to determine if you qualify to file for Chapter 7 without losing your assets.

The main thing to remember in a Chapter 7 is that if you have a home, a new car, or anything of value, you stand to lose those assets. The Trustee is bound by law to SELL those assets to satisfy at least some of your debts before you can have any of those debts discharged. There are exemptions in every state that will allow you to keep up to a certain percentage of the equity in your home & car, etc....but you need to understand that there's a very good chance you could lose those assets in a Chapter 7 filing.

A Chapter 13 filing is called the "wage-earner" plan - and for good reason. If you have a job, and your income (again, under the Means Test) falls within a certain percentage of the average income for your area, you will end up filing a Chapter 13, which is actually a debt repayment plan.

The major difference between Chapter 13 and Chapter 7 is that Chapter 13 will save your house from foreclosure if you are behind on your payments - a Chapter 7 won't. However, there are a few things to remember with a Chapter 13:

-the payments will most likely come right out of your paycheck via garnishment

-the plan will take what the law determines is your "disposable income" for the plan payment - what you call disposable may be something entirely different - and a lot less.

-the plan will last 3 to 5 years, during which you will still incur OTHER debt - doctor bills, car repair bills, home repair bills, vet bills, school bills, etc. These will still have to be paid, out of what you have left after the plan payments are made. You have to bear in mind that you will be living on much less income for a number of years, and will still have to pay those additional bills on that decreased income.

-the attorney gets their money first. That means that for the first several months of the Chapter 13 plan, none of your debts are getting paid - so your house (if you include it in the plan), your credit card bills, etc., are not getting paid - in fact, they're getting further behind, until the attorney gets his entire fee paid. The fee for Chapter 13 can be pretty high - from $1500 to $3000 depending on the case.

It's not that Chapter 13 is a bad idea - it is sometimes the only option - but you have to bear these things in mind.