Understand Chapter 7 and Chapter 13 Bankruptcy After Divorce

Getting divorced is already mentally exhausting. Understand the key differences between Chapter 7 and Chapter 13 bankruptcy to inform you of your options and provide peace of mind.

Understand Bankruptcy After Divorce

You are considering filing bankruptcy after divorce, and have to consider the differences between Chapter 7 and Chapter 13 bankruptcy. It's important to understand what each entails, considering that the length of time and costs are vastly different between Chapter 7 and Chapter 13 bankruptcy. There are a multitude of ways in which these two types differ, including:

  1. How Long It Takes to Get Debt Relief. 
  2. Credit Report Impact
  3. How Much Bankruptcy Costs 
Let's begin with a general understanding of Chapter 7 and Chapter 13 bankruptcy.

Understanding Chapter 7 vs Chapter 13 Bankruptcy After Divorce

Chapter 7 bankruptcy is common when getting divorced as it’s much faster and much less expensive than Chapter 13 bankruptcy. This is not much of a surprise as most people are not financially literate enough to understand the bankruptcy options and understand the working of the suitable alternatives to use. From our discussion with numerous Chapter 13 bankruptcy applicants, most of them have no idea of the following: 
  1. You can often pay the Chapter 7 bankruptcy fee in installments.
  2. It’s more expensive to apply for Chapter 13 bankruptcy than a Chapter 7 bankruptcy. 
  3. You may not lose your home and vehicle when you file for Chapter 7 bankruptcy 
We’ll discuss more details of these below.

Understand Chapter 7 Bankruptcy

Chapter 7 bankruptcy is sometimes called liquidation bankruptcy. This is primarily because Chapter 7 of the bankruptcy code enables the bankruptcy trustee to sell a debtor's assets that are above exemptions. Most chapter 7 cases don’t result in an asset loss, but the risk of losing an asset is still high if an exemption doesn’t cover it. This means that you can only lose your property if you don’t review the exemption options you have.   You can file Chapter 7 bankruptcy as:
  • Businesses 
  • Individuals whose debts are majorly business debts 
  • Income earner whose income is within the requirement of Chapter 7 bankruptcy (you may get a discharge) 
What this means is that the only way for a non-business entity to get a discharge is by meeting the requirements. If you still want to apply for this discharge, then ensure you first estimate your qualification with the bankruptcy means test. The bankruptcy means test helps determine whether you have the means to pay back some of the debt in bankruptcy.

Chapter 13 Bankruptcy

This is a type of bankruptcy where a debtor is offered the opportunity to restructure their debts and, in turn, get a debt discharge certificate. However, this bankruptcy is not open to all as one needs a verifiable source of income to qualify. Self-employed income earners may file for Chapter 13 bankruptcy if there's proof that such income is steady. Businesses that want a similar bankruptcy plan can opt for a Chapter 11 bankruptcy. The term period for a typical Chapter 13 bankruptcy is 60 months; however, a debtor may opt for a 36 months payment term if they would rather have the bankruptcy process end sooner.  The amount an individual will be required to pay for bankruptcy differs through multiple factors, some of which include their income, expenses, assets, and the amount of debt. In some instances, recent financial transactions affect the Chapter 13 bankruptcy plan.  In a situation where you don’t qualify for a Chapter 7 bankruptcy and want to opt for a Chapter 13 bankruptcy, you can estimate your Chapter 13 payment via a free Chapter 13 calculator online.

Pros and Cons of Chapter 7 Bankruptcy

Before applying for a Chapter 7 bankruptcy, it’s best to first weigh the pros and cons of this option. Here are some noteworthy merits and demerits to consider:
  • By filing for a Chapter 7 bankruptcy discharge, you’re exploring one of the fastest means of getting rid of your unsecured debts. How? This is because it takes 6 months after filing to get a debt discharge. 
  • Debt collection agencies stop pursuing you.
  • Debtors are not mandated to repay portions of their debt. 
  • Debtors can clear their unsecured debt by surrendering their collateral to the trustee. The trustee will then sell these assets and use the proceeds to pay unsecured creditors. 
  • Chapter 7 bankruptcy is one of the cheapest debt relief options.
  • Nonexempt assets could be liquidated by the bankruptcy trustee.
  • You may lose your assets if you can’t afford payments. 
  • Chapter 7 bankruptcy does not discharge all debts. As such, the debtor may still be required to make payments on some loans. Examples of debts that this bankruptcy doesn’t discharge include alimony, child support, most tax debts, student loans, etc. 
Now let’s cover the Chapter 13 bankruptcy pros and cons.

Pros and Cons of Chapter 13 Bankruptcy

If you want to make the right choice, it’s best to first consider these pros and cons: 
  • Chapter 13 bankruptcy helps to prevent cases of foreclosures and repossessions. Debtors are offered a more favorable term to make automobile and mortgage loan repayments in this bankruptcy. 
  • It costs far more to apply for a Chapter 13 bankruptcy than a Chapter 7 bankruptcy; however, payments for attorneys are often scheduled with the bankruptcy repayment plan. 
  • Old tax debts and some due payments may be included in the payment plan 
  • Chances are higher that you’ll keep your assets in a Chapter 13 bankruptcy than the Chapter 7 bankruptcy. However, a debtor whose asset is not covered by a Chapter 13 bankruptcy exemption may still own the asset if he offers to pay more than the Chapter 13 bankruptcy payment plan stipulates. 

Divorce Bankruptcy Considerations

Bankruptcy and divorce are common. Consider the following attributes when you get divorced to help you make the most informed decision.

Foreclosures and Repossessions

Chapter 13 bankruptcy can be a much more effective plan to stop foreclosure, and it does this by making bankruptcy payments a part of the Chapter 13 repayment plan.  A Chapter 7 bankruptcy doesn’t go well with automobile loans that are behind. Your lender may require you to catch up on your car payments.  A Chapter 13 bankruptcy on the other hand can help you spread payments on your loan at a much reduced monthly payment. In some instances, a bankruptcy court may give you an option of cramming down the loan if your debt is worth less than your loan payoff, and you’ve been the owner of the vehicle for over 910 days. 

Equity in Assets and Property

A bankruptcy exemption only protects your asset on a specified level of equity. If your asset is above your state’s bankruptcy discharge, then there’s a high probability that you’ll lose your asset. However, it’s possible to keep some of your assets if you negotiate for a slightly higher loan repayment plan.  

Income Requirements

Choosing between Chapter 13 and Chapter 7 bankruptcy can be confusing and the consequence of making a wrong choice can be dire. The ultimate determinant of who gets a Chapter 7 bankruptcy is the means test, which is itself dependent on income. If you’re willing to file under Chapter 7 bankruptcy, then it's best to understand how to pass the Chapter 7 means test by being below the income limit; it’ll help you understand the intricacies of passing the test. The means test simply involves calculating your median income and comparing it with the state’s median income. If your income is higher than the state’s median income then it’s best to opt for a Chapter 13 bankruptcy discharge. 

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