Filing for bankruptcy is never an easy decision. People often file for bankruptcy after a long period of financial stress. Unexpected financial troubles like a medical emergency or job loss can strain relationships and upend lives. Fortunately, the Bankruptcy Code provides individual consumers with a fresh start and a chance to reorganize and recover. Our attorneys can help you explore your options if you are thinking about bankruptcy or facing foreclosure.
One of the first recommendations we will make is whether it is better for you to file Chapter 7 vs. Chapter 13 bankruptcy. Filing for bankruptcy under Chapter 7 vs. 13 is an important decision that determines what debts you must pay back and when. Each Chapter’s unique rules will impact whether you will be able to keep your car or home in bankruptcy. In both cases, you may receive a discharge. Many of your debts will be canceled, including medical bills and credit cards.
When you are ready, we’ll start by explaining the pros and cons of Chapter 7 vs. Chapter 13 bankruptcy. Your choice might be influenced by the following:
- Your income,
- The amount you owe, and
- The type of debts you have.
Both chapters have income limits, but higher-income debtors may not qualify for Chapter 7. At the same time, if you can afford to repay your debts, you may need to file under Chapter 13. Under Chapter 7, secured creditors can reclaim their collateral if you don’t keep up with the payments. This often means that if you don’t keep up with payments on your car or house, they can be repossessed. Chapter 13 gives you three to five years to catch up on your secured debts, including late payments.
What Is Chapter 7 Bankruptcy vs. Chapter 13?
When you file Chapter 7 bankruptcy, creditors must stop all collection efforts, including letters, phone calls, and foreclosure proceedings. Asset that you want to keep have to be protected by your bankruptcy exemptions. If you have assets that aren’t protected the trustee will sell the non-exempt assets and distribute the proceeds to your creditors. Once your estate is administered, you may receive a discharge of most remaining debts, like medical bills and credit cards. Many debtors receive a discharge in three to four months and get to keep all of their assets. See our post What are Maryland Bankruptcy Exemptions?
A Chapter 13 bankruptcy is called a “wage earner’s plan.” Instead of liquidating your assets, you pledge all of your disposable income to your creditors for a few years. The “automatic stay” prohibiting collection efforts continues over the life of the plan. Thus, Chapter 13 gives you time to catch up on your mortgage while you stay in your home. You will receive a discharge of most debts at the end of your three-to-five-year plan.
How Can I Keep My Home in Chapter 7 vs. Chapter 13 Bankruptcy?
If a mortgage is one of the debts you’re struggling with, you don’t necessarily have to give up your home. What happens with your home mortgage in bankruptcy depends on whether you’re behind on payments and which type of bankruptcy you file.
The value of the home usually secures a home mortgage. Thus, the home’s mortgage is a secured debt in bankruptcy, which has priority over unsecured debts. The bankruptcy discharge erases your obligation to repay the loan. However, you must continue your payments if you want to keep your home. If you fall behind on your payments after bankruptcy, the lender can still enforce its lien on the collateral.
In Chapter 7, the trustee will liquidate all non-exempt assets. Most states, including Maryland, have exemptions to protect most personal property from liquidation. You can use the exemption for “owner-occupied residential real property” to protect your home. Another option is to use your “wild-card” exemption to protect your home’s value. A wild-card exemption protects cash or selected items of property up to a certain amount, usually a few thousand dollars.
Chapter 13 is a good option if you are already behind on your mortgage payments. Your Chapter 13 plan will include one payment for your regular mortgage payment and one to cover the arrears. The plan should bring you up to date on your payments. Thus, you must stay current on any payments due after the filing, or your lender may collect its collateral.
Debts Not Discharged In Personal Bankruptcy—Chapter 7 vs. 13
Many debts are discharged in personal bankruptcy. You no longer have a legal obligation to repay a discharged debt (although a secured creditor’s lien remains). If the debt survives the discharge, you must continue repaying the debt.
The Bankruptcy Code excludes certain debts from the Chapter 7 bankruptcy discharge, including:
- Student loans,
- Certain tax claims,
- Debts not listed on your bankruptcy petition,
- Spousal or child support or alimony,
- Damage awards for willful and malicious harm to another,
- Damages for personal injury caused by driving while intoxicated,
- Court fines and penalties,
- Certain tax-advantaged retirement plan contributions, and
- Condominium or cooperative housing fees.
A debtor in a Chapter 13 case has a slightly broader discharge of debts than in a Chapter 7 case. Debts dischargeable in Chapter 13 but not in Chapter 7 include non-dischargeable tax obligations and property settlements in divorce proceedings. Finally, you will not be eligible for a Chapter 13 discharge unless you complete the plan or demonstrate hardship.
Southern Maryland Law: Over 25 Years of Experience Handling Bankruptcy Cases
Our team has decades of experience handling bankruptcy cases. We know financial hardship can hit you hard. There’s no need to be ashamed to visit our office. We have heard it all and have likely dealt with a case very similar to yours in the past.
Our attorneys will help you navigate the laws specifically designed to help people like you manage unexpected financial stress. Because bankruptcy is not “one size fits all,” we will take the time to listen to your situation. All bankruptcy consultations are 100% no obligation. Plus, we charge a flat fee for all bankruptcy cases, depending on your case’s complexity.
Financially getting back on one’s feet can be a daunting task. We provide the help you need to get there. Call Southern Maryland Law today to start on your road to debt relief.