Advantages and Disadvantages of Bankruptcy

Advantages of a Chapter 7 bankruptcy filing:

  • iStock_000005927762_ExtraSmallThere’s no limit to the amount of debt that can be discharged.
  • Unsecured debts (as permitted by law) are eliminated or discharged.
  • Any wages earned and property acquired after the bankruptcy filing date (except for inheritances) are not subject to claims by the bankruptcy court or creditors.
  • There is no minimum amount of debt required to file a Chapter 7 bankruptcy case.
  • A Chapter 7 bankruptcy case is often concluded within 90 to 120 days after the date of filing, thereby enabling you to obtain a fresh start and move beyond the burden of your debts relatively quickly.

Disadvantages of a Chapter 7 bankruptcy filing:

  • Any non-exempt property is subject to liquidation by the trustee.
  • Some debts survive the bankruptcy, e.g., and can be collected after your case is closed.
  • Chapter 7 does not cancel secured debts and, if facing foreclosure or repossession, such efforts by the lender are only temporarily stalled by the bankruptcy filing.
  • Co-signors of a loan remain liable on the debt unless they likewise file for bankruptcy relief or reach a resolution with the creditor.
  • A debtor may only file for Chapter 7 bankruptcy relief once every 8 years.
  • Bankruptcy impacts your credit rating.
  • It is difficult to voluntarily withdraw from a Chapter 7 bankruptcy filing.

Advantages of a Chapter 13 filing and payment plan:

  • iStock_000008051940_ExtraSmallYou generally are able to keep all of your property, exempt and non-exempt.
  • You are afforded a longer period of time to pay your debts than if the bankruptcy had not been filed.
  • Debts that are not permitted a discharge in a Chapter 7 case can be reduced in a Chapter 13 bankruptcy.
  • You are afforded protection against creditors’ collection efforts and wage garnishment efforts.
  • Any co-signors are not subject to collection efforts of the creditors so long as a Chapter 13 Plan provides for full repayment of the debt.
  • You are protected against foreclosure by your mortgage lender while making timely payments under the Plan.
  • A Chapter 13 bankruptcy may be filed after a Chapter 7 discharge to pay off any remaining liens.
  • You may file a Chapter 13 bankruptcy more frequently than permitted under Chapter 7.
  • Creditors are separated by classification and receive different percentages of payment.

Disadvantages of a Chapter 13 bankruptcy filing and payment Plan:

  • Plan payments come from the debtor’s disposable income (i.e., that amount which remains after expenses are deducted from income) which restricts your cash over the repayment period of the Plan.
  • Some debts may survive after the bankruptcy is closed for which you must continue paying.
  • The legal fees associated with a Chapter 13 bankruptcy are higher than under a Chapter 7 filing due to the increased complexity.  Your debts and repayment Plan can linger for years, thereby burdening future income until Plan completion.
  • There is a limit on the amount of debt liability when filing a Chapter 13 bankruptcy.  Currently, unsecured debt may be no greater than $383,175, while secured debt must be less than $1,149,525.  These amounts adjust every three years, with the next adjustment taking place April 1, 2016.
  • Stockbrokers, commodity brokers, and others employed in a similar capacity cannot file a Chapter 13 bankruptcy petition.

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