Frog asked:
I am under the impression that on a chapter 13 you repay your debt but on a 7 you walk away from your debt. So does society look at a 13 more favorable? And in a 7 you start to rebuild your credit as soon as its discharged, in a 13 do you have to wait 5 years to start rebuilding your credit? If this is all true, why even offer a 13?
4 comments ↓
It’s not so much that chapter 13 is offered it’s more a matter of which do people qualify for.
Under the new bankruptcy laws that went into effect back in October of 2005 people must now take whats called a means test to see which chapter they qualify for. If you make more then the mean average income for your State then you must file chapter 13 if not your eligible for chapter 7.
Credit wise chapter 7 is much better because like you said people can start reestablishing their credit as soon as their bankruptcy is discharged.
13 is for those with morals to pay their debts.
7 is liquidation.
Any assets that can be attached and sold by the courts are used to pay a portion of the debt.
This takes 7 years to go away.
You are correct in the basics of each Bankruptcy. However there is more to it.
To qualify for a Chapter 7 you have to first pass 2 means tests. The first is if you earn more than the average for your state, the second is if you have enough disposable income to pay back at least $100 a month for 3-5 years. If you fail on either of these you may be forced into a Chapter 13. A Chapter 13 is also used in certain situations when people have houses that they want to keep. A lawyer who specializes in Bankruptcy can guide you through which one is best for your situation.
As for which one “looks” better. In the end they are both Bankruptcies so they both have a negative effect. If you go with a Chapter 13 it is not “discharged” until your payment plan is complete. This is anywhere from 3-5 years. So during this time you can not get new credit, but once it is discharged it is just like a Chapter 7 and you can start to rebuild your credit.
Chapter 13 tends to be used by more affluent people who did not qualify to file under the new Bankruptcy Reform bill passed under Bush. Most high-income people normally will not qualify to file for Chapter 7 today unless there are extreme circumstances. Chapter 13 is basically a court-ordered repayment plan that your creditors have to accept.
Chapter 13 does have a couple of advantages: past-due mortgage payments and student loan debt can be included in a Chapter 13 filing…they can’t in Chapter 7. It will also allow you to pay back debt at greatly reduced interest rates…which can be a HUGE advantage.
Rule of thumb: If you qualify to file for Chapter 7, then you should file that and not Chapter 13.
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