Nearly 1 million non-business bankruptcies are filed each year in the United States.
Before the 2008 recession, the vast majority of them were Chapter 7 bankruptcies, but since new laws and regulations were put in place, many more filings have been Chapter 13 instead.
The reason is because the qualifications and circumstances for each filing can differ dramatically, so it's important to know which of these would work best for you.
We'll be focusing on Chapter 7 bankruptcy and Chapter 13 bankruptcy, since these are for individuals whereas Chapter 11 is for businesses.
What we'll cover:
- How bankruptcies work: A quick comparison between Chapter 7 and Chapter 13
- Liquidate your house to Sell My House Easy Fast
- Can you reduce the principal loan balance of secured debts?
- Drawbacks from Chapter 7 bankruptcy
- Sell your house before it goes to auction
- Drawbacks from Chapter 13 bankruptcy
- How is your home affected in Chapter 7 and Chapter 13?
How bankruptcies work: A quick comparison between Chapter 7 and Chapter 13
While each version of bankruptcy has many different qualifications and requirements - known as the bankruptcy means test, we can summarize it so that it's easier to identify if you can rule one out altogether.
Chapter 7 bankruptcy is known as liquidation bankruptcy. That's because almost all of your assets will be sold in order to cover as much of your total debt as possible. Each state will grant certain exemptions for things like your home, car, and personal assets, but how much the exemption covers will differ by state and anything above those allowed amounts will be sold. In order to qualify for Chapter 7, you must be below a threshold income level, where you're not able to pay back all or some of the debts.
When you file for the Chapter 7 bankruptcy, there's an order called the "automatic stay", which immediately stops most creditors from pursuing collections. When the court appoints a trustee, that trustee will then begin assessing and selling nonexempt property in order to cover part or all of your remaining debts.
This option works well for low-income debtors with little or no assets (as long as the criteria are met).
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Chapter 13 bankruptcy is known as a reorganization bankruptcy. Rather than liquidating your assets, the court will negotiate and set up a repayment plan that usually lasts between 3 and 5 years. There many forms of repayment plans that can be set up through negotiations, and usually its on a case by case basis, but the premise is simple: you have a monthly payment for 3-5 years, and once that payment is made, the rest of your unsecured debt is discharged (meaning you're off the hook). This form of bankruptcy does not require you sell your house, car, or other personal assets.
Because you'll be able to keep all your property (house, car, etc), this is generally an ideal option for those who do not qualify for Chapter 7 bankruptcy. It also works for those that have non-dischargeable debts such as alimony or child support arrears (past due payments) that they want to consolidate into the 3-5 year repayment plan.
This option can also assist in catching up missed house or car payments so that you can keep the those assets.
Once the Chapter 13 bankruptcy repayment plan is complete, then the debts will be fully discharged. This will also allow to remove unsecured junior liens from real property (through lien stripping) if all the requirements were satisfied and it was agreed upon by the court.
Can you reduce the principal loan balance of secured debts?
Chapter 7 Bankruptcy: You may be able to reduce the principal balance of only tangible personal property, which often involves paying the actual value of the property. For example, if you owe a substantial amount on a loan of a property, then a redemption can be a good plan to pay the current actual value, which may be lower than the remaining loan amount. An important note about redemption is that you must pay the agreed upon amount in a lump sum.
Chapter 13 Bankruptcy: There is an option for reducing balances owed on secured debts, which is called a Chapter 13 "cramdown". Similar to the Chapter 7 redemption, the cramdown allows you to reduce your loan down to the market value of the property. This is most often used for upside down loans on cars and mortgages for investment properties. You may not perform a cramdown on your residence, although there are other options when dealing with residential mortgages, such as appending past due balances and arrears to the end of the loan as part of your repayment plan.
Drawbacks from Chapter 7 bankruptcy
In the Chapter 7 bankruptcy, because it is a liquidation process, the trustee can sell your nonexempt property. This means that your house and car may be subject to being sold (or any extra houses/cars) and personal property over the exempted amount.
In this type of bankruptcy, it does not provide a way to catch up on missed payments in order to avoid repossessions or foreclosures. This means that, although there is an automatic stay placed when the bankruptcy filed, once the process is complete, the foreclosure/repossession will proceed.
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Drawbacks from Chapter 13 bankruptcy
In the Chapter 13 bankruptcy, you must make monthly payments for the agreed upon payment period (generally 3-5 years). You may have to pay back a portion of general unsecured debts, or full amounts, depending on the negotiation during the court proceeding.
If you miss any or some of the monthly payments, then a trustee may request for the court to dismiss your case for failing to comply with the repayment plan. There's a high chance that the case will be terminated, which means that creditors are able to pursue collections again, and your debts will not be discharged.
How is your home affected in Chapter 7 and Chapter 13?
For more detailed information on each Chapter of bankruptcy, check out articles that will include specific details on how to get started, benefits, and drawbacks.
For Chapter 7, click here.
For Chapter 13, click here.
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