Hi everyone! So you are on line searching for information on the basics of bankruptcy. How does it work? What are the differences between a chapter 7 and a chapter 13? Which bankruptcy looks better on my credit report? These are all great questions right? But, can someone explain them in simple terms? I can!
Whenever I hire a professional, I want you to explain things simple terms. Too many times professionals instinctively go back to the lingo they use and are comfortable with. The problem is- for most of us, you might as well be speaking Greek!
What Is a Chapter 7 Bankruptcy?
Filing Chapter 7 Bankruptcy in Minneapolis is like pushing a reset button on your life and your debt life. Before you push the button, you have 50k in credit card debt. After you push the button you have no debt. Sometimes chapter 7 bankruptcy is referred to as a fresh start bankruptcy because it gives you a fresh start!
The focus in a chapter 7 bankruptcy is on things you own. The vast majority of people who file chapter 7 bankruptcy in Minneapolis lose no assets. That is to say, they keep their homes, cars, clothing, furnishings, pensions, and other assets. Occasionally, a client will have a non exempt asset, which is to say, an asset we cannot protect from your creditors and the trustee’s job is to liquidate the non exempt assets and pay your creditors a share of the proceeds.
Ok Wes, you have lost me. Let’s use an example. If you have 100k in credit card debt and you have non exempt assets that total 10k (say you own a condo in Florida with equity of 10k in it). The trustee’s job is to liquidate or sell the condo. The trustee doesn’t want the condo and the trustee would even prefer not to have to sell the condo. What the chapter 7 trustee would prefer is the debtor make an offer to pay the estate some money to keep the condo.
Let’s say debtor says ok, I will pay the estate 6k to keep the condo in Florida. That means the trustee will take (if the deal is acceptable to the trustee) the 6k and pay your creditors (which total 100k) a pro rata share of 6k and the balance of your debt gets wiped out, tax free, forever! So even if you have non exempt assets, often you can make deals to keep those assets and pay the estate some money to retain those assets.
In this example, debtor pays 6k to get rid of 100k in debt! Not bad right? While most debtors lose no assets in a chapter 7 bankruptcy, even those people who do have non exempt assets can make a deal with the chapter 7 trustee to keep those assets.
Do I make payments to my creditors in a chapter 7 bankruptcy?
No, in a chapter 7 bankruptcy, you make no payments to your creditors. Besides making a deal on non exempt assets, debtors do not make payments back to creditors in a chapter 7 bankruptcy.
Chapter 13 bankruptcy- sometimes referred to as a wage earner plan
I describe chapter 13 bankruptcies as a government sponsored debt consolidation plan with some added benefits. First, the chapter 13 plan is a 3-5 year plan. It cannot be shorter than 3 years and it cannot be longer than 5 years.
Second, while in the chapter 13 plan, debtor’s pay what they can afford to pay- and that is it. So for example, say you have 100k in credit card debt. If you can only afford to pay 20k over the life of the plan, then the rest of your debt gets wiped out, when you get your discharge, tax free!
Good grief, why in the world would anyone do a traditional debt consolidation plan when the government already has the best debt consolidation plan possible? We wonder ourselves! At its core, the chapter 13 bankruptcy puts your family first and your creditors second. Why? So your family can live and eat and breathe again. Whatever is left over after you pay your family’s reasonable and necessary expenses is what gets paid to creditors.
For many of our Minnesota guests, it’s not that they don’t have a good income or the ability, over time, to pay back their creditors. The problem for so many of our guests is that they are getting hit from all directions from creditors and they cannot breathe! When you file a chapter 13 bankruptcy creditors are barred by law from doing anything to collect from you.
That gives our guests time to breathe again and find their footings.
Which is better on my credit, a chapter 7 or a chapter 13 bankruptcy?
Here is where most of our guests are flat out wrong in their thinking. I know we all want to pay our bills, and we all really do want to do. But when you are faced with feeding your family first or your creditors first, what are you going to do? You are going to do what we all would do- protect family first!
So many people think that if you are making an effort to repay your creditors, it looks better on your credit score. It does not. Getting rid of debt is what looks better on your credit report. Think about it. For most people we meet, their credit is already crap, or it soon will be. If you file a chapter 7 bankruptcy, you are debt free in 4 months. If you file a chapter 13 bankruptcy, you are not debt free for 3-5 years.
Banks would prefer to lend money to those people who are already debt free. Why? Because the bank then is assured they will get paid back! And that, is all the bank really cares about. Getting credit while you are in the middle of a chapter 13 bankruptcy is possible but more difficult- why? Because you are not debt free until the end of the plan.
So, for those guests who file a chapter 7 bankruptcy, your credit score will actually improve sooner than if you file a chapter 13 bankruptcy and make payments over time. I know it sounds crazy, but it is true!
Life is humbling. If you have not been humbled by life, you are not alive. Bad things happen to good people all the time. Sometimes pushing the reset button is the best thing you can do for your family and your life. We hope the above bankruptcy basics give you clarity as to your choices.
Whether you do a chapter 7 or chapter 13 bankruptcy, you get relief. That is what our guests are looking for- relief from the overwhelming burden of debt. We hope you find relief soon!