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Debt Relief

Understand Chapter 7 and Chapter 13 Bankruptcy, Costs, and Alternatives

Based on the definition of bankruptcy from Oxford Languages, Bankruptcy is defined as, “the state of being completely lacking in a particular quality or value.” Interestingly when someone files bankruptcy it doesn’t necessarily mean that they completely lack a particular value or quality. Generally speaking, most of the consumers that file bankruptcy are individuals that are facing a financial hardship where they are unable to pay their debts. Furthermore, this could mean that the debt is too high or their income is too low, either way, they are in a hardship where they are unable to pay their debts.

In this article, I will go through

  1. What is Chapter 7 Bankruptcy?
  2. What is Chapter 13 Bankruptcy?
  3. Why You Should Learn About Chapter 7 and Chapter 13 Bankruptcy?
  4. Impact of Filing Bankruptcy

1. What is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is considered liquidation bankruptcy. This is the process of wiping out most of your debt through the payment of a flat Chapter 7 filing fee and attorney fee. Filing a Chapter 7 bankruptcy is based on passing the Chapter 7 means test by falling below the income limit for Chapter 7 based on your state.

Cost to File Chapter 7 Bankruptcy

One of the most common questions is how much does bankruptcy cost. How is one able to afford bankruptcy when they are unable to afford their utility bill.

The cost to file bankruptcy depends on many different factors such as the state you live in and the chapter you decide to file. You can find bankruptcy lawyer fees as low as $600 and as high as $1,800. The filing fee for a Chapter 7 bankruptcy is generally around $300 – $350.

Often, bankruptcy attorneys also take payments plans to help cover the cost before filing bankruptcy. In 2020 and 2021, many attorneys are now offering $0 down payment options. Please understand that the cost may be higher when aggregating the payments as the attorneys do take some risk of nonpayment.

Protecting Your Assets in a Chapter 7 Bankruptcy

You can run the risk of losing your assets through a Chapter 7 bankruptcy, which is why it is important to learn about Chapter 7 bankruptcy and the impact it may have. In almost every state there are state-specific bankruptcy exemptions that allow you to protect your assets under an equity limit.

Bankruptcy Homestead Exemption

Just as it is important to protect your car through bankruptcy, you may want to see if you could be losing your home through Chapter 7. You can take a look at the bankruptcy homestead exemption to understand the potential risk of losing your home. If your home appears to exceed your state or federal bankruptcy homestead exemption, you may want to consider Chapter 13 bankruptcy.

2. What is Chapter 13 Bankruptcy?

The wage earners bankruptcy, Chapter 13 bankruptcy, is the process of restructuring your existing unsecured and secured debt into a repayment plan. The Chapter Bankruptcy 13 repayment plan generally will last either 3 or 5 years. If you fall below the median income guideline you will most likely be put on a 3-year repayment plan while if you are above the guideline, you may be placed in a 5-year plan. Many people wonder whether Chapter 13 is worth it due to the cost and length of time.

Chapter 13 Bankruptcy Plan Payment Example

Whether you are put on a 3 or 5-year plan, the expenses included should all be quite similar. Here is a Chapter 13 Payment Plan Example:

Attorney Fee $83 Administration Fee $75 Trustee Fee $121 Mortgage Payment(s) $1,039 Auto Payment(s) $489 Secured Payment(s) $0 Disposable Income $0

I touched on bankruptcy exemptions earlier in the article, it is also important to understand how the equity you have in your home may affect your Chapter 13 monthly plan payment. For instance, if your state’s homestead exemption is $50,000 and you have $100,000 in equity with $100,000 of unsecured debt. You may have to $50,000 over the 5 years to cover the amount of equity exceeding the homestead exemption.

You can estimate qualification by taking a Chapter 13 bankruptcy means test calculator or speaking with a local bankruptcy attorney. Many would say Chapter 7 is more affordable than Chapter 13 bankruptcy, often due to bankruptcy attorney fees, trustee fees, and the potential amount you pay back.

3. Why You Should Learn About Chapter 7 and Chapter 13 Bankruptcy?

According to the US bankruptcy courts, there were 774,940 bankruptcy cases in 2019, and 544,463 in 2020. There was a decrease of 29.7 percent during the time of the pandemic. The reason I bring this up is that it is quite clear that there are a lot of folks still filing bankruptcy regardless of the circumstances. With that being said, understanding Chapter 7 and Chapter 13 bankruptcy can be crucial.

4. Impact of Filing Bankruptcy

The impact from Filing Chapter 7 Bankruptcy

  1. Conventional loan – 4 years from discharge date
  1. FHA and VA loans – 2 years from discharge date
  1. USDA/Rural Housing – 3 years from discharge date

Impact from Filing Chapter 13 Bankruptcy

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