Category Archives: Chapter 7 Bankruptcy

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Bankruptcy is a legal option that can provide relief for people who can no longer keep up with their debts. While this route can alleviate an excessive financial burden, there are pros and cons of filing for bankruptcy. For instance, while it can provide you with a fresh start, it can make it difficult to be eligible for new forms of credit down the road.

 

The decision to file for bankruptcy should be considered carefully, weighing not only the benefits and the potential relief it can bring but also the drawbacks. So, what are the pros and cons of filing for bankruptcy?

 

There are a lot of misconceptions about what it means to file for bankruptcy, which can lead to unnecessary stigma.

 

For instance, there is a commonly held belief that those who file for bankruptcy are irresponsible when it comes to managing money. In reality, the high cost of medical expenses is one of the leading causes of bankruptcies.

 

Other misconceptions are that if you file for bankruptcy, you can lose all of your belongings or never be eligible for credit again. Neither of these statements is true. Your assets are often protected by federal or state exemption laws — though you may have to sell some of your belongings in a Chapter 7 case — and many bankruptcy filers are able to secure forms of credit again.

 

There are six types of bankruptcy, but the average consumer will usually file one of two:

 

• Chapter 7: This is the most common form of bankruptcy for individuals. With this method, valuable assets are liquidated to settle debts. Chapter 7 is typically split into asset cases and no-asset cases; if you are determined to be a no-asset filer, you won’t have to give up your belongings. Chapter 7 bankruptcy can stay on your credit report for up to 10 years, starting on the filing date.
• Chapter 13: This is the second most common form of bankruptcy that individuals file. With Chapter 13 bankruptcy, a three-to-five-year repayment plan is created. This form of bankruptcy can stay on your credit profile for up to seven years.
• The type of bankruptcy you qualify for may depend on your income and the value of your assets. For example, to see if you qualify for Chapter 7 bankruptcy, you’ll have to take a means test to determine your eligibility. If you’re not eligible for Chapter 7, you may have to file for Chapter 13.

 

 Filing bankruptcy: The Good

While it shouldn’t be undertaken lightly, bankruptcy can be a much-needed life raft for consumers who are drowning in debt. Here’s a look at some of the benefits of filing for bankruptcy.

 

  You’re granted an automatic stay

The instant you file, you are protected under a provision in bankruptcy law called the automatic stay. Creditors cannot pursue payment of your debts or take other actions against you until the bankruptcy is discharged or a repayment plan has been finalized.

 

  You’ll get relief from dealing with multiple creditors

Filing bankruptcy can mitigate the pressure and overwhelming nature of handling numerous creditors. In fact, you may experience immediate relief once your debts are discharged and you no longer have to repay some or all of your financial obligations.

 

  You’ll receive a court-appointed representative

Once you file your petition for bankruptcy, you’ll be assigned a trustee who will see your case through to discharge. They will operate on your behalf throughout the process, including handling all communication between you and your creditors, and in the case of Chapter 13 bankruptcy, they will be the one to receive and process your payments.

 

  Bankruptcy can prevent further legal action

One of the largest benefits of bankruptcy is that you could be legally cleared of responsibility for your debt. On top of that, it could potentially prevent any future legal trouble related to the nonpayment of that debt. Keep in mind that not all debts are dischargeable, but most forms of unsecured consumer debt can be wiped out in bankruptcy.

 

  You may be able to keep some assets

In Chapter 13 bankruptcy, you are likely to be able to keep your assets as you repay your debts, but even when your assets are liquidated under Chapter 7, some valuables may be protected by federal or state exemption laws, depending on where you live.

 

  Some back taxes can be addressed

Filing bankruptcy can be an effective way to deal with back taxes, especially in a situation in which wages are being garnished. While most tax debts cannot be dismissed in bankruptcy, some older tax debts can be discharged. To be eligible, your tax debts must be at least 3 years old and must be income taxes. Fraud penalties and payroll taxes are never eligible for discharge.

 

  Bankruptcy may prevent home foreclosure or car repossession

Chapter 13 bankruptcy can be a tool to delay or stop a foreclosure or car repossession. You may also be able to keep your vehicle if it is covered under exemption laws.

 

For example, a federal exemption allows you to have up to $4,450 in equity for your vehicle. If your vehicle is worth $4,000, for example, you may be able to keep the car because it falls under a federal exemption.

 

  Your debts may be settled for less than what you owe

Your creditors will be forced to accept whatever payment is determined in your bankruptcy case, which sometimes means receiving no payment at all. If you qualify for a Chapter 7 bankruptcy, you could have all of your unsecured debts dismissed, including credit card debt, personal loans and medical debt.

 

However, Chapter 13 bankruptcy can be trickier because you may have to repay some of those debts over the course of three to five years.

 

  Some debts will be completely written off

Once your bankruptcy case is closed, any debts that are discharged are gone for good. Your creditors cannot come back and try to collect on any debts that were dismissed during bankruptcy.

 

  Bankruptcy could potentially increase your credit score

It’s no secret that bankruptcy can hurt your credit. But if your credit score wasn’t great before you filed for bankruptcy, you could potentially see an increase after your debts are discharged. Debt elimination could help lower your credit utilization ratio, which is one of the factors that determine your credit score.

 

  You can take on new credit after your debts are discharged

The process of rebuilding your credit after bankruptcy can start immediately after your debts are discharged. In some cases, individuals are approved for credit cards almost immediately after they receive their discharge order. You will face some limitations as you attempt to take on new credit, however, especially since your credit score is likely to be low. A good place to start may be a secured credit card.

 

  You’ll get a fresh start

Bankruptcy can potentially provide you with a much-needed clean slate to begin rebuilding your financial life. This new start can help consumers reestablish their credit and build healthy habits around money.

 

 Filing bankruptcy: The Bad 

Of course, filing bankruptcy also comes with many drawbacks. Given the complex nature of the process, we recommend contacting an experienced bankruptcy attorney to assist with your case.

 

  You could lose assets of value

Depending on which type of bankruptcy you qualify for, your income, the equity in your assets and other factors, you may lose your home, your car and other valuable items. Your trustee may be required to sell these items to repay your creditors.

 

  Bankruptcy can be expensive

You’ll need to cover the costs of bankruptcy, including service and court fees. The average Chapter 7 bankruptcy case costs between $1,000 and $1,750 in out-of-pocket costs, while the average Chapter 13 bankruptcy costs around $3,300.

 

  Federal student loans are exempt from bankruptcy

In most cases, federal student loans are not dischargeable; there are some exceptions, but they are rare. Instead, if you’re struggling to keep up with your federal student loan payments, you may have to look into forbearance, deferment or income-based payment plans.

 

  You may still be responsible for some debts

While most debts can be discharged, there are some debts you will still be responsible for repaying. Besides federal student loans, certain other liabilities are not dischargeable, including taxes, alimony, child support, court orders and debts incurred through illegal activity.

 

  If you have joint accounts, the other party is still responsible

Creditors can demand payment from the nonbankrupt debtor or any cosigners you have. This is an important factor to consider before adding a co-applicant to a credit application, and you’ll want to be sure your co-borrower understands this as well.

 

  You could face criminal charges if you aren’t honest

The information you provide when filing for bankruptcy will be scrutinized. If you provide inconsistent or false information, you could face legal action. It is in your best interest to be completely honest about the assets you own and any income you receive.

 

  Bankruptcy is a long process

A Chapter 7 bankruptcy moves pretty quickly and typically discharges within a few months after filing. A Chapter 13 bankruptcy, however, is a much longer process since you’ll have to follow a three-to-five-year payment plan before your case is discharged.

 

  You could lose your business

If you own a business and the trustee in your case determines it has value, you could be forced to sell it. In some instances, the trustee may operate the business until the sale is complete.

 

  You may face eviction

If you rent your home and are behind on your payments, you could be forced to leave the property once the bankruptcy is discharged. However, if you are current on your rent payments, it is uncommon to be evicted over a bankruptcy filing.

 

  You’re likely to have trouble renting in the future

You could experience difficulty renting a home after declaring bankruptcy, as some landlords or management companies may automatically reject prospective tenants who have a bankruptcy in their credit history.

 

  Bankruptcy can impact your job or career

Bankruptcy may disqualify you from holding certain positions, though it’s rare for this to happen. Filing for bankruptcy is most likely to cause trouble for those who work with money, including jobs in accounting or payroll. When you apply for a new job, a potential employer could see your bankruptcy filing during a credit check for employment since it’s public record.

 

  Your bankruptcy will be made public

Bankruptcies are publicly reported, so people you know could potentially discover that you filed. This includes if someone runs a background check on you for employment or housing.

 

  Your trustee may continue to administer your assets after discharge

Depending on the specifics of your case, the trustee may pursue the sale and distribution of your assets after your debts have been discharged. This can include any assets and income acquired within 180 days of the discharge, such as an inheritance or divorce settlement.

 

  Your credit score is likely to drop

Depending on your credit score before filing, you could see a significant drop. If you had a good credit score before you filed for bankruptcy, you may see a pretty big drop. However, if your score is already low, there may not be much of an impact on your credit score.

 

  You’ll experience difficulty gaining future credit

Your bankruptcy will follow you for quite some time. Chapter 13 can stay on your credit report for up to seven years, while Chapter 7 can remain for up to 10 years. If you apply for a form of credit and the lender runs a credit inquiry, it will be able to see your bankruptcy and may not approve your funding request.

 

  You’ll receive high interest rates and low credit limits

Even though you may qualify for new credit after filing for bankruptcy, it may come at a premium. You’re more likely to be charged high interest rates, as creditors may see you as a risky borrower, and you may only be eligible for low amounts of credit.

 

  You’ll have to wait to purchase a home

Before you can qualify for a mortgage, you’ll have to wait anywhere from one to four years, depending on the type of mortgage. If you file for Chapter 7 and plan to apply for a conventional mortgage, the waiting period is four years. With a Chapter 13 bankruptcy, you’ll have to wait two years from your discharge date.

 

  Your car insurance premiums will go up

Car insurance companies use an industry-specific credit report based on your credit file, so if you need to secure auto insurance after filing bankruptcy, your rates will likely be impacted.

 

  Bankruptcy stays on your credit report for up to 10 years

Your bankruptcy will remain on your credit report for up to 10 years from the date of discharge. While the impact will lessen over time, it can play a factor in any financial moves that require credit inquiries.

 

  It doesn’t address the cause of your financial trouble

While bankruptcy can be a solution in certain circumstances, it doesn’t fix what led to the problem in the first place. Without a solid plan in place, you could repeat your mistakes and end up needing to file bankruptcy a second time.

 

  It cannot be undone

Bankruptcy is final. You cannot change your mind once your case is finalized. This is why it’s important to fully understand what you’re signing up for when you decide to file for bankruptcy. Credit counseling — which is required when filing for bankruptcy — can help you determine whether it’s the right move for you.

 

Source

https://upsolve.org/learn/is-it-bad-to-file-for-bankruptcy/

Discover the four chapters that enable debt restructuring for bankruptcy filers.

There are two bankruptcy systems available to assist people and businesses with astronomical debt. The first option, Chapter 7 liquidation bankruptcy, is for people who lack the resources to pay their debts. The second system offers a way for people and companies with some disposable income—but not enough—to manageably restructure their debt. In essence, a reorganization plan is the budget that a debtor who files for bankruptcy (debtor) proposes to use to pay creditors.

The Four Reorganization Bankruptcy Chapters Depending on the specific situation, debtors may elect to reorganize under Chapter 9, 11, 12, or 13. According to filing frequency, a summary of each is displayed.

Individuals and Couples in Chapter 13

This chapter permits individuals who are single or married to contribute their discretionary income—the sum left over after covering living expenses—to a plan for a period of three to five years, but not businesses other than sole proprietorships.

Your plan will last 60 months if your family’s income is higher than the median income for your state. When income is below the median, 36 payments are necessary; however, if necessary, you can propose a plan that spreads out the required payments over 60 months. (Click on Means Testing Information on the U.S. Trustee website to view the median income for your state.)

What Happens to Debts During the Plan Period?

Some debts are given a higher priority under bankruptcy law, and the debtor is required to pay them in full over the course of a three- to five-year plan. These are some examples of priority claims:

Recent income tax debts, past-due alimony and child support obligations, as well as overdue payments on secured debts like house notes (you don’t have to pay off the entire mortgage within the plan, but you must make progress toward it).

The majority of your other debts, including credit cards and medical expenses, will be classified as general unsecured debts and won’t necessarily receive any payment. Only if you have extra cash after paying all of your higher priority claims will they receive something. Even then, the unpaid claims may only receive pennies on the dollar. At the conclusion of the case, the outstanding debt is discharged.

Making a Secured Debt More Affordable Through the Plan

The ability of a Chapter 13 plan to cram down (reduce) a secured debt that isn’t a mortgage on your home or a recently bought car is another intriguing feature. You can propose to pay just the asset’s value plus interest that is one or two points above prime if the collateral (the asset used to secure the debt) is worth less than what you owe. This can help you save thousands of dollars if you have high-interest loans that are in default.

Regrettably, not all secured loans are crammed down. It is not available for home mortgages or auto loans that are less than 2.5 years old at the time your case is filed. Additionally, for high-value property like vacation rentals, you must be able to pay off the entire cram down sum over the course of the plan, which is something many people are unable to do.

Although you cannot cram down your home mortgage, you may be able to remove a junior mortgage through a Chapter 13 plan if the value of your property has fallen too low to pay off your primary mortgage. (This was frequently used during the housing crisis; however, due to rising property values, its availability is constrained.)

Chapter 11: Organizations and People

The best-known benefit of Chapter 11 bankruptcy is that it helps keep big businesses from going out of business. Due to the costs associated with filing a Chapter 11 case, small businesses use it less frequently, and occasionally, individuals whose debt balances exceed the Chapter 13 debt limitations will do so.

In many Chapter 11 cases, creditors actively collaborate with the debtor to assess the debtor’s financial situation and choose the most effective strategy for paying off the debt. Renegotiating loan terms is just one aspect of this collaboration, though it is a significant part of the overall strategy.

The parties carefully examine a number of aspects of the business during the initial months of a Chapter 11 case. Choosing to carry out one or more of the following actions is possible:

Change the leadership, sell off underperforming assets, or restructure the business to be more productive.
The debtor then suggests a strategy for repaying its obligations. Not only must the bankruptcy court approve a Chapter 11 plan, but also the creditors who are owed the most money. A creditor (or the trustee, if one has been appointed) may offer a plan that will be put to a vote by the creditor body in the absence of a confirmable plan from the debtor. Once a plan is approved, the debtor can take years to implement its provisions.

Operation of Farms and Fishing in Chapter 12

You’ll probably decide to file for Chapter 12 bankruptcy if farming or fishing is your main business. While Chapter 12 bankruptcy offers more flexibility due to its recognition of the seasonal nature of the farming and fishing industries, Chapter 13 bankruptcy cases follow a similar procedural framework.

A plan lasting between three and five years must be proposed by the Chapter 12 debtor within 90 days of filing the case. The Chapter 12 plan may permit one-time payments during certain seasons as opposed to the monthly payments mandated by Chapter 13 bankruptcy. Almost any secured debt, including mortgages on homes and farmland, may be crammed down under the plan, and the modified secured debt payments may go beyond the five-year plan limit.

Chapter 9: Local Government

Municipalities and other governmental entities like utilities and taxing districts are the only ones permitted to file for bankruptcy under Chapter 9. Chapter 9 bankruptcy plans and the procedure for approving them are comparable to Chapter 11 plans. In a Chapter 9 case, creditors cannot make a plan proposal; however, both taxpayers and creditors may object to a plan.

Exemptions from bankruptcy play an important role in both Chapter 7 and Chapter 13 bankruptcy. Exemptions are used in Chapter 7 bankruptcy to determine how much of your property you get to keep. Exemptions in Chapter 13 bankruptcy help you keep your plan payments modest. Learn more about bankruptcy exemptions and how they work by reading on.

What Are the Different Types of Bankruptcy Exemptions?

Exemptions allow you to keep a specific amount of assets, such as a cheap car, professional tools, clothing, and a retirement account, safe in bankruptcy. You don’t have to worry about the bankruptcy trustee appointed to your case taking an asset and selling it for the benefit of your creditors if you can exclude it.

Many exclusions cover specific property kinds up to a certain dollar value, such as a car or furnishings. An exemption can sometimes protect the asset’s total worth. Some exemptions, known as “wildcard exemptions,” can be used on any of your properties.

Is it okay if I keep my baseball cards? Jewelry? Pets?

The goal of bankruptcy is to give you a fresh start, not to take away all of your possessions. You’ll probably be able to protect other items as well, such as religious literature, a seat in a building of worship, or a burial plot, in addition to the fundamentals. Chickens and feed are even exempt in some states. However, you should not make the mistake of assuming that everything will be well.

• Items of high value. There are no exemptions for boats, collections, pricey artwork, or holiday homes. Instead of filing for bankruptcy, owners with such valuable assets often sell the property and pay off their debts.
• Jewelry. Many states provide protection for wedding rings up to a certain value. Don’t expect to preserve your Rolex, diamond necklace, or antique broach collection, though.
• Pets. The dog or cat you rescued from the shelter is unlikely to fall into the trustee’s hands. Why? It’s not that you’ll have a specific exemption to protect it; rather, the trustee would have to pay more to sell it than it’s worth in most circumstances. However, if you own a valuable show dog or a racehorse with high breeding costs, you may be forced to sell it or pay for it in bankruptcy.

Exemptions: What Are They and How Do They Work?

Whether you’re filing a Chapter 7 or Chapter 13 bankruptcy, exemptions play a significant role.

Bankruptcy under Chapter 7

A liquidation bankruptcy is one in which the appointed trustee sells your nonexempt assets to satisfy your creditors. Because the bankruptcy trustee cannot sell exempt property, exemptions assist you protect your assets in Chapter 7 bankruptcy. If your state offers a $5,000 motor vehicle exemption and you only own one automobile worth $4,000, for example, you can keep it. See Exemptions in Chapter 7 Bankruptcy for more details.

Bankruptcy under Chapter 13

You can keep all of your property and rearrange your debts with a Chapter 13 bankruptcy (which can mean paying less on some of them). The amount you must pay specific creditors, however, is still determined by how much property you can exclude. Unsecured creditors who are not priority (such as credit card companies) must be paid an amount equal to your nonexempt assets. Exemptions assist keep your Chapter 13 bankruptcy plan payments modest by lowering the amount you must pay creditors. See Exemptions in Chapter 13 Bankruptcy for more details.

Bankruptcy Exemptions at the State and Federal Level

There are bankruptcy exemptions in each state. A series of exemptions is also provided by federal law. (See The Federal Bankruptcy Exemptions for further information.) Some states force you to use their exemptions, while others allow you to choose between their exemptions and the federal system (you cannot mix and match the two).

The state exemption rules you’ll be able to use will be determined by where you lived in the previous two years (called the “domicile requirements.”). Read Which Exemptions Can You Use In Bankruptcy? for more information on the distinctions between state and federal exemptions and domicile requirements.

Nonbankruptcy Exemptions in the United States

In addition to state and federal bankruptcy exemptions, there are a number of federal nonbankruptcy exemptions. These exemptions work in a similar way to bankruptcy exemptions in terms of preserving your assets. Nonbankruptcy exemptions from the federal government are only available if you use your state’s exemptions (you cannot combine the federal bankruptcy and nonbankruptcy exemptions). You can use nonbankruptcy exemptions in addition to state exemptions if you are using state exemptions. See The Federal Nonbankruptcy Exemptions for further details.

If You File for Bankruptcy, What Can You Keep?

The purpose of bankruptcy isn’t to strip you of all of your belongings—it’s to give you a fresh start. Most people can keep the basic items needed to work and live.

However, if you’re considering filing for bankruptcy, you might be wondering, “Can I keep my baseball cards? Jewelry? Pets? The simple answer is that it depends.

You’ll likely be able to protect other things, like religious texts, a seat in a house of worship, or a burial plot. Some states even exempt chickens and feed. But you shouldn’t assume that everything will be safe.

• Luxury items. Exemptions for yachts, collections, expensive artwork, and vacation homes don’t exist. Owners of such valuable assets often sell the property and pay off debt instead of filing for bankruptcy.
• Jewelry. Many states protect wedding rings up to a particular dollar amount. However, don’t count on keeping a Rolex, diamond necklace, or antique broach collection.
• Pets. The dog or cat you rescued from the shelter is probably safe from the trustee’s clutches. Why? It’s not that you’ll have a specific exemption to protect it, but rather that in most cases, it would cost more for the trustee to sell it than what it would be worth. If, however, you own an expensive show dog or a racehorse that fetches sizeable breeding fees, you might have to turn it over—or pay for it—in bankruptcy.

Find out what you can protect by reviewing your state’s exemptions.

How Do Bankruptcy Exemptions Work?

Exemptions always protect the same amount of property regardless of the chapter filed. However, what happens to “nonexempt” property you can’t protect with a bankruptcy exemption will depend on whether you file for Chapter 7 or Chapter 13 bankruptcy.

Chapter 7 Bankruptcy and Exempt Assets

Chapter 7 bankruptcy is a liquidation bankruptcy where the appointed trustee sells your nonexempt assets to pay your creditors. Exemptions help you protect your assets in Chapter 7 bankruptcy because the bankruptcy trustee can’t sell exempt property.

For example, suppose your state has a $5,000 motor vehicle exemption, and you have one car worth $4,000. In that case, the exemption will cover all of the car’s equity, and you can keep it. For more information about keeping a car in Chapter 7 and other property, see Exemptions in Chapter 7 Bankruptcy.

Chapter 13 Bankruptcy and Exempt Assets

A Chapter 13 bankruptcy allows you to keep all your property while paying some or all of your debt in a three- to five-year Chapter 13 repayment plan. But this benefit comes at a cost. You’ll have to pay nonexempt creditors for the property you can’t protect with an exemption.

Nonpriority unsecured creditors, such as credit card issuers, must receive at least as much as the value of the property you can’t exempt. So in Chapter 13 bankruptcy, being able to exempt all or most of your property helps keep your monthly plan payment low.

Learn more about exemptions in Chapter 13 bankruptcy.

State and Federal Bankruptcy Exemptions

Each state has a set of bankruptcy exemptions, and federal law provides a federal bankruptcy exemption set, too. Some states require you to use the state exemptions, while others allow you to choose the state or the federal bankruptcy exemption set. But you must choose one or the other–you can’t mix and match exemptions from two sets.

The state’s exemption laws you’ll qualify to use will depend on where you lived during the last two years, called the “domicile requirements.” For more information about the differences between state and federal exemptions and domicile requirements, read Which Exemptions Can You Use In Bankruptcy?

Federal Nonbankruptcy Exemptions

A second set of federal exemptions called “federal nonbankruptcy exemptions” can be used along with your state’s exemptions. For more information, see The Federal Nonbankruptcy Exemptions.

Medical debt can be discharged in bankruptcy, but you should first look into nonbankruptcy options.

If you have decent credit and are having difficulties paying a significant medical bill, you might want to look into alternative possibilities before declaring bankruptcy.

It is true that declaring bankruptcy would probably result in a decline in your credit, albeit it might not last as long as you believe. However, you can be in an even worse situation if you can’t pay the medical expense and don’t declare bankruptcy.

Here is what to anticipate.

You’ll initially start getting reminders of late payments. The medical provider could eventually sue you and win a financial judgment. Then you might not be able to undo some of the effects of bankruptcy, such as wage garnishment, a bank levy, or the placement of a lien against your property.

Options Other Than Bankruptcy for Medical Debt

If you have strong credit, you might be able to use one of these methods to pay off your hefty medical cost.

Talk a Deal With the Health Care Provider

To begin with, confirm that all insurance payment difficulties have been resolved. Consider settling with the creditor after you have obtained all applicable insurance coverage. The medical provider may deduct a portion of the fee if it was for uninsured medical expenses. Many hospitals and other healthcare organizations often waive or reduce bills for patients without insurance.

Inquire Regarding Assistance Programs

Depending on your economic level, most hospitals have assistance programs that, if you qualify, will give you free or reduced hospital care. For instance, the Hospital Care Assurance Program (HCAP) will pay costs for procedures that are deemed medically necessary in several jurisdictions. Additionally, federally tax-exempt non-profit hospitals may have to be lenient with you and other patients who are in financial need when it comes to medical billing. This may be relevant to you. To learn more and apply for the necessary coverage, get in touch with the financial aid counselor at your hospital.

See Managing High Medical Debts for further information on these and other choices.

Bankruptcy for Medical Debt

Your good credit may suffer since a collection action will appear on your credit report if you are unable to pay the debt and it appears that the creditor may pursue you for payment. Additionally, if the provider sues you and wins, it may garnish your pay or pursue other forms of recoupment.

In addition to erasing your debt, filing for bankruptcy will put you back on the path to financial recovery as quickly as possible.

Medical debt and Chapter 7

A Chapter 7 bankruptcy may be the best option for you if you have low income and assets with little to no equity. You are not need to have a certain amount of debt. On a single, sizable debt, you may apply for Chapter 7. Medical debt will be eliminated in Chapter 7 bankruptcy, along with the majority of other unsecured debt (debt that isn’t secured by security).

Healthcare Debt and Chapter 13

You can file for Chapter 13 bankruptcy if you don’t meet the requirements for Chapter 7 bankruptcy or if you own assets that you might lose in a Chapter 7 bankruptcy. You will pay back the percentage of the medical debt you can afford through your repayment plan in Chapter 13 bankruptcy. At the conclusion of the case, the court will discharge (wipe out) the remainder.

Learn the difference between a charge off and a repossession and how they’re handled in bankruptcy cases.

A charge off and a repossession are two very different things—although both could happen to one debt. In this article, you’ll learn what each term means, as well as how the bankruptcy court handles these events in Chapter 7 and Chapter 13 bankruptcy.

What Is a Charge Off?

“Charge off” is an accounting term that simply means that the account has been removed from the company’s books because no payments have been made in 120 to 180 days (depending on the type of account.)

Most people come across the term “charge off” after reviewing a credit report. Because a charge off is associated with an unpaid debt, many assume that charged off means that the debt is no longer collectible and that you no longer owe the money. That’s not the case.

A notation of a charge off indicates that the lender is no longer showing the account as a bad debt on the bottom line. That usually doesn’t stop the lender’s collection efforts. The lender can continue trying to collect the debt. Often the lender will transfer or sell the debt to a collection agency. In turn, the collection agency either collects the debt for the lender or, if the collection agency purchased the debt, collects it for its own benefit. Either way, a charge off is merely an accounting term, and you still owe the debt.

The Federal Reserve requires a lender to charge off a credit card debt when it is 180 days late. A car loan or installment loan must be charged off when it is 120 days late.

Can a Charged Off Loan be Reinstated?

Once a loan is charged off, don’t count on the loan showing up on the company’s books again. Even if you offer to pay it, chances are it’s been transferred or sold and the original company no longer has an interest in it. If you pay the debt, the company that purchased the account should show that you paid it off, but unfortunately, the original lender can continue reporting the charge off for seven years.

How are Charge Offs Treated In Bankruptcy?

When you file for bankruptcy, you agree to disclose your entire financial situation in exchange for the benefits provided by the chapter that you file. (Find out which bankruptcy will be better for you in What Is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?)

You must list all debts when you fill out your bankruptcy paperwork—including charged off accounts. If you don’t list them, you risk the debts not being discharged (wiped out). All kinds of debt can be charged off, including car loans and other debt secured by collateral, and unsecured debt, like a credit card balance, medical bill, or personal loan. If you file for Chapter 7 bankruptcy, you can expect the court to discharge the charged-off debt within three to four months (the average time it takes for a Chapter 7 case to end). In a Chapter 13 bankruptcy, you’ll pay any discretionary income—the amount remaining after paying allowed monthly expenses—to your unsecured creditors over the course of your Chapter 13 bankruptcy payment plan. All eligible unsecured debts get discharged when you complete your plan.

If the charge off is a secured debt—such as a car loan or mortgage—then you’ve likely already lost the collateral (the house or the car) through repossession (see below) or foreclosure. In that case, you’ll list the account as an unsecured debt in your bankruptcy paperwork.

If a debt has been charged off but you still have the collateral, and you’d like to keep it, you should speak with a bankruptcy attorney as soon as possible.

What Is a Repossession?

A repossession occurs when a creditor takes possession of the collateral—usually a car—that you put up when taking out a loan. Here’s how it works.

Before a lender agrees to lend you money for a car purchase, you must agree to guarantee payment of the loan with the vehicle. The contract creates a lien in favor of the lender. The lien allows the lender to take the car, sell it, and apply the sales proceeds to the loan if you default on your payment. If the auction price isn’t enough to pay off the loan, you’ll still owe the remainder called a “deficiency balance.” (The lender releases the lien on the car after you pay the loan balance.)

Can a Loan on a Repossessed Car be Reinstated?

If you lose the car to repossession, most state laws will give you some time to get the car back. The process is called “reinstating the loan.” Reinstatement requires you to pay any past-due amount, as well as the lender’s costs for the repossession.

Repossessions can occur with property other than cars as well. Furniture, jewelry, and other personal property pledged to secure a loan can be repossessed, as long as the lender follows the state laws.

Can a Car Loan be Charged Off Without a Repossession?

It’s possible to charge off a loan without having the dealer repossess the car. As stated earlier, car loans are supposed to be charged off if no payment has been made for 120 days. But, unsecured debt, like credit cards or medical accounts, can stay on the books until they’re 180 days old. Usually, a lender will repossess the collateral and sell it, long before 120 days pass. Almost always, the proceeds of the sale won’t be enough to cover what’s owed on the loan, and most lenders will need to charge off the remaining balance.

No law requires the lender to repossess the collateral before charging off the loan. The lender could choose to do it the other way around or could choose not to repossess the car at all. The lender might be forced to forgo repossession if the car can’t be located or if the car’s value is less than it would cost to sell at auction (for instance, if the car was totaled in an accident). The lack of a repossession doesn’t alter the need to charge off the loan or prevent the lender from selling the charged off loan to a debt buyer.

How are Repossessions Treated In Bankruptcy?

If your car is repossessed before the bankruptcy is filed, you might be able to reinstate the loan and regain possession of the car, but you have to work quickly. You’ll have to file a Chapter 13 bankruptcy case and propose a three to five-year repayment plan.

In Chapter 13 bankruptcy, it’s possible to reinstate a loan by including it in your repayment plan. In fact, this is one of the key benefits of a Chapter 13 bankruptcy case. Not only will it stop a repossession (or a foreclosure) in its tracks, but you can spread out your payment arrearages over the repayment plan rather than paying the entire overdue amount right away. You’ll have to continue paying your monthly payments, too, but by the end of the payment plan, you’ll own the car free and clear. If you don’t want to keep the car, the balance owed will get discharged (wiped out) with other qualifying debt at the end of your plan.

Filing a Chapter 7 case instead will not help you get your car back, because Chapter 7 has no mechanism for getting you caught up or reinstating the loan.

Which is Worse: Charge Off or Repossession?

If you default on your car loan, you could suffer a charge off, a repossession, or both. It’s hard to know whether the charge off or the repossession looks worse on your credit report. Credit scores are based on all the information in your credit report, good and bad, and the credit reporting agencies and companies that produce credit scores like the FICO score keep their scoring models a secret. Someone having trouble with one account like a car loan often has difficulty keeping other accounts in line. Your credit score can take a hit from late car payments, repossessions, past due credit card payments, judgments, tax liens, and other negative or derogatory entries.

Experience tells us that both a repossession and a charge off of the car loan can cause a significant hit, maybe as much as 100 points. Not only will both a repossession and a charge off have a profound effect on your score in the short run, but they will also continue to influence your credit score and the credit decisions of potential lenders for seven years (although the derogatory information has less effect on your credit score the older it gets.)

Source

https://www.nolo.com/legal-encyclopedia/the-differences-between-a-charge-off-and-repossession-in-bankruptcy.html

Most people seek bankruptcy relief to wipe out their debts and get a fresh start. While you can eliminate many debts in bankruptcy, certain obligations (called nondischargeable debts) survive your bankruptcy discharge. Read on to learn more about the difference between dischargeable and nondischargeable debts and how they are treated in bankruptcy.

What Are Dischargeable Debts?

Dischargeable debts are obligations that can be wiped out by your bankruptcy discharge. When you receive your discharge, you are no longer obligated to pay any of these debts and creditors cannot come after you to collect them.

A few examples of dischargeable debt include:

• credit card debt
• medical bills
• personal loans made by friends, family, and others, and
• past-due utility bills.

Timing and Debt Dischargeability

If a bill comes due after you file for bankruptcy, you might find yourself wondering whether the balance will go away. It’s common to be confused about whether ongoing accounts, such as utility bills, get completely wiped out at the end of the case, or whether the bankruptcy discharge is limited to the portion owed before the filing date.

Post-petition debts—the new bills that you incur after you file your initial bankruptcy paperwork—don’t qualify for discharge. You’ll remain responsible for paying for them. The only type of debt eligible for discharge is “pre-petition debt,” or, debt that existed before you filed your matter.

Example. Suppose that you file a Chapter 7 case. In your bankruptcy schedules, you list your overdue water, sewer, and garbage bill. The Chapter 7 discharge will wipe out any portion of the utility bill account balance that predated your filing. However, you’ll be required to pay any charges that accrued after your filing date.

The same holds true in a Chapter 13 bankruptcy. All pre-petition debts get included in the Chapter 13 plan (the three- to five-year payment plan that you must complete before receiving a discharge). All of your post-petition debts, such as a monthly cell phone bill or a new gym membership, remain your responsibility to pay.

Be aware, however, that when you’re in a Chapter 13 case, unexpected obligations can come up. Not only is this understood, but the court might be willing to adjust your plan payments to accommodate you. To learn about your options, read Post-Petition Debts in Chapter 13 Bankruptcy.

How Are Dischargeable Debts Treated in Bankruptcy?

In most cases, you can eliminate dischargeable debts in bankruptcy without any repayment. However, whether your creditors will receive anything in your bankruptcy will depend on whether you are filing for Chapter 7 or Chapter 13 bankruptcy.

Dischargeable Debts in Chapter 7 Bankruptcy

Most Chapter 7 bankruptcies are no asset cases—there’s nothing for the trustee to sell to pay creditors with. As a result, dischargeable debts are typically wiped out without receiving anything in Chapter 7 bankruptcy.

Further, if there are any proceeds to distribute, general unsecured debts (such as credit card obligations) are the last to get paid and receive a pro-rata share of any money left over after all priority debts (such as alimony, child support, and some taxes) get paid.

However, keep in mind that your discharge only eliminates your liability for these debts. It does not affect liens on your property (such as a mortgage or car lien). As a result, if you stop paying your mortgage or car loan, your lender can still foreclose on or repossess your property even if it cannot sue you personally to collect the debt.

Dischargeable Debts in Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, most dischargeable debts are considered nonpriority general unsecured claims. Depending on your income, assets, and expenses, they typically receive little or nothing through your Chapter 13 repayment plan. And they are discharged upon completion of your plan payments.

However, if a dischargeable debt is secured (such as your car loan), you have two choices. If you want to keep the car, you must continue making payments on it during your Chapter 13 bankruptcy (if you meet certain conditions, you might be able to reduce your principal balance through a Chapter 13 cramdown). Alternatively, you can surrender the car, and discharge your liability for the car loan.

Source: https://www.nolo.com/legal-encyclopedia/what-is-the-difference-between-dischargeable-nondischargeable-debts-bankruptcy.html