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Pros and Cons of Filing Chapter 7 or Chapter 13 Bankruptcy

Chapter 7 vs Chapter 13 Bankruptcy

When you think Vegas, you think “money, money, money.” While it attracts many high rollers, Nevada is a state that has a high rate of financial hardship, with almost 10,000 bankruptcy filings in 2019. Nevada has the sixth-highest health uninsured rate in the country, which means that everything from a small health issue to a dangerous disease could easily derail someone’s finances. And right now, with recent events, money is tighter than ever. While bankruptcy often is not the first choice, it is a great option when one is needed. Below is a list of pros and cons for both Chapters 7 and 13.

Chapter 7 Pros

  • Discharge is often very fast. A typical Chapter 7 case is completed within three to four months after filing.
  • You can keep most or all of your property. Exceptions apply. Consult with one of our attorneys for further information.
  • Stops debt collection lawsuits & garnishments once a case is filed. It even stops non-dischargeable debt for a period of time.
  • Prevents or gets rid of deficiency liability. (A deficiency is the amount of money owed to a creditor after a foreclosure or repossession.)
  • You can start rebuilding credit almost immediately after filing.
  • If you have property you would like to surrender, you may do so in a Chapter 7 bankruptcy and be free of that debt.
  • Your debt to income ratio is on the up & up.
  • You get a fresh start.

Chapter 7 Cons

  • Losing property. Chapter 7 is a liquidation bankruptcy. Any property that is not protected by bankruptcy exemptions is at risk of being sold by the Chapter 7 trustee. This rarely happens, but one of the best reasons to use an attorney is to ensure that this doesn’t happen in your case.
  • Credit Score & credit report impact. Your credit score may be negatively impacted and your credit report will have a public record showing a bankruptcy for 10 years.
  • Some debts are not dischargeable, including most taxes and student loans. Alimony, child support, restitution, some judgements, and some types of government debt are also not dischargeable in a bankruptcy.
  • Harder to prevent foreclosure and repossession. Because there is not a bankruptcy repayment plan in Chapter 7, you must catch up on mortgage payments and car loan payments quickly to keep that property. If you are behind on any secured debt, you will need to be current on payments or you are in risk of losing it in the bankruptcy.
  • There are income requirements to qualify for a Chapter 7 bankruptcy. The bankruptcy means test compares your income to the average income of households in your state. If your income exceeds the median income for your state, you may not qualify. The court may want you to repay some of your debt in a chapter 13 instead.

Chapter 13 Pros

  • Saving your home from foreclosure.Unlike a Chapter 7 a chapter 13 case can stop foreclosure permanently.  In a Chapter 13 plan you can catch up on past due mortgage payments over several years.
  • Getting rid of a second mortgage. You may be able to get rid of a second mortgage in Chapter 13. You cannot do this in a chapter 7 unless you surrender the home altogether.
  • Getting rid of tax debts. Income tax debts are sometimes not dischargeable in a bankruptcy. However, you can spread tax payments over three to five years to help you pay off. non-dischargeable tax debts. Some of the income tax debt might be dischargeable without having to pay if it meets various requirements.
  • Help with car payments. If you are behind on your car payments, Chapter 13 can also help avoid repossession by restructuring your car payments, lowering the interest rate, lowering the amount you owe (in some cases), and stretching out the payments over 60 months.
  • Help with Domestic support payments. Any alimony, child support arrears can be paid through your Chapter 13 plan.
  • Getting rid of unsecured debt. General unsecured debts, such as credit card debts, medical bills, etc. Depending on your financial situation, you may get rid of those debts in Chapter 13 by paying just a small percentage, often less than 1% of the debt, through the bankruptcy repayment plan.

Chapter 13 Cons 

  • Credit score & credit report impact. Your credit score may go down in a Chapter 13 and will be reported typically for 7 years.
  • Attorney’s fees are typically higher in a Chapter 13 case rather than a Chapter 7.
  • There is usually limited payment flexibility in Chapter 13 bankruptcies.
  • The length of time for a Chapter 13 case is either three or five years.

Filing bankruptcy is a great fresh start, whether it be Chapter 7 or 13. For all of you out there struggling to get by, tired of living paycheck to paycheck, not being able to vacation when you want or buy a home, car, property, etc. My personal message is this, if you have exhausted all other options and truly believe that bankruptcy is the best thing for you to do, then do it. Don’t listen to the stigma people have and the hype they create on how bad bankruptcy is. Just do it. I did it and have never felt better!

Yours truly,

Paralegal at Fair Fee Legal Services

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