“A Comprehensive Guide to Bankruptcy: Eligibility, Impact, and Application”

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How Does Bankruptcy Work?

Bankruptcy is a legal process managed by federal courts in the U.S. that helps individuals, couples, and businesses avoid financial ruin due to overwhelming debt. Upon successful completion of a Chapter 7 or Chapter 13 bankruptcy, many consumer debts are discharged or eliminated.

Debts that can be discharged through bankruptcy include:

• Unpaid credit card bills and outstanding balances
• Medical bills
• Unpaid rent and utility bills

Debts that cannot be discharged through bankruptcy include:

• Unpaid alimony and child support payments
• Certain unpaid taxes and criminal fines
• Certain federal student loans

Chapter 7 Bankruptcy vs. Chapter 13 Bankruptcy

There are significant differences between Chapter 7 and Chapter 13, the two main forms of bankruptcy available to individuals and couples in the U.S. The primary differences concern how each process handles the repayment of your creditors.

In Chapter 7, if your financial means fall below a specified limit, assets valued beyond an exempt amount must be forfeited and sold, and the proceeds are distributed among your creditors. In a Chapter 13 proceeding, a bankruptcy trustee collects monthly payments from you for a period of three to five years to repay your creditors.

What Are Eligibility Rules for Bankruptcy?

Determining which type of bankruptcy you’re eligible for depends greatly on your income. If your current monthly income falls below the median for your community, you are eligible for Chapter 7 bankruptcy. If your income exceeds that amount, a means test is required to determine Chapter 7 eligibility.

You can qualify for Chapter 13 bankruptcy if you have regular income and your total secured and unsecured debts are less than $2,750,000 (the limit for 2024) on the date you file for bankruptcy.

Will I Need to Repay All of My Debts in Chapter 7 and Chapter 13 Bankruptcy?

No. Neither Chapter 7 nor Chapter 13 insists on repayment of all outstanding debts. In Chapter 7, if you have assets of value in excess of the amount exempt by state and federal law, they are sold and the proceeds are distributed to your creditors. If those funds are insufficient to cover all of your dischargeable debts, your obligation to pay any remaining portion of those debts is eliminated.

A Chapter 13 repayment plan must be structured to enable full repayment of priority debts such as delinquent alimony and child support payments. It can also be used to bring you current on delinquent mortgage or car payments, and allow you to keep nonexempt assets such as boats or vacation property.

How Does Filing Bankruptcy Impact Credit?

Bankruptcy is recorded on your credit reports and will adversely impact your credit scores and creditworthiness the entire time it is on your report. Chapter 7 bankruptcy remains on your credit report for up to 10 years, and Chapter 13 stays there for up to seven years, both dated from the month you file for bankruptcy.

Is It Better to File Chapter 7 or Chapter 13 Bankruptcy?

If you qualify to file for either Chapter 7 or Chapter 13 bankruptcy, choosing which procedure to follow depends on your circumstances. If you have steady income and are behind on mortgage and/or car payments but wish to keep your home or car, a Chapter 13 repayment plan is your only option for preventing foreclosure and/or repossession.

If you have relatively few assets, Chapter 7 can eliminate dischargeable debt relatively quickly—typically within three to five months of your filing date—so you can start rebuilding your finances fast.

How Do I Apply for Bankruptcy?

Before filing for either type of individual bankruptcy, you must obtain pre-bankruptcy credit counseling from a court-approved certified credit counselor. This counselor can help you sort out your options and provide guidance on the paperwork you must submit with your bankruptcy filing. All necessary forms are available to download free from the U.S. Bankruptcy Court website.

Filing for bankruptcy comes at a cost in the form of court fees. The fees for filing are $338 for Chapter 7 and $313 for Chapter 13. Additional administrative fees may apply if certain documents or addenda must be filed in connection with your case.

Whether you file for Chapter 7 or Chapter 13 bankruptcy, it’s typically a good idea to hire a lawyer to help with your bankruptcy. Even minor mistakes or missing a deadline by a day could get your petition thrown out. Attorney fees can differ by locality, and also depend on the nature and complexity of your case.

The Bottom Line

Chapter 7 and Chapter 13 bankruptcy differ in their approaches to repaying your creditors and their ability to protect assets you may want to keep. While both can provide relief from crippling debt, they also do significant harm to your credit and ability to borrow money. With patience and care, you can rebuild your credit after bankruptcy.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We are here to help you navigate through your financial challenges and find the best solutions for your needs.

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