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Types of Bankruptcy
There are several types of bankruptcy, but only two that consumers generally need to be concerned with.
CHAPTER 7 BANKRUPTCY. If you qualify for a Chapter 7, you can “discharge” (effectively eliminate) most of your debts without having to repay anything. Not everyone qualifies for a Chapter 7. Under the new bankruptcy law, all debtors must take a “means test.” The bottom line is that if your income is above the average for your state, OR if you can afford to pay more than $100 per month to your creditors after all of your reasonable expenses are taken into consideration, then you will probably not be allowed to file a Chapter 7.
CHAPTER 13 BANKRUPTCY is a solution wherein you make monthly payments to a court appointed trustee for a period of 3 to 5 years (3 years if your income is below the state median, 5 years if it is above the state median.) The amount you pay is as much as you can afford to pay – meaning that your reasonable living expenses are subtracted from your income, and everything left over goes to the trustee.
A Chapter 13 may be your best option if:
a. You owe large tax debts that cannot be eliminated by a Chapter 7 and you want to stop the interest and penalties by forcing the IRS to take a payment plan. b. You own real estate that is being foreclosed on; or c. You don’t qualify for a Chapter 7 and you want to stop lawsuits against you.
CHAPTER 13 VS. DEBT SETTLEMENT
The chart below gives a comparison between a Chapter 13 Bankruptcy and a Debt Settlement Program.
|Chapter 13||Debt Settlement|
|Amount you pay||Your “Best Efforts,” meaning your gross income minus your reasonable expenses.||What you feel you can afford. As a rule of thumb, it will be 50% of the balance on your debts divided by 36.|
|Who decides how much you pay?||You make a proposal, which can be commented upon by the Trustee, and is subject to final approval or disapproval by the Court.||You do.|
|Effect on Potential Lawsuits||No lawsuits are allowed while a Chapter 13 is pending, except as allowed by the Bankruptcy Court.||Creditors can still file lawsuits against you while you are in a Debt Settlement program.|
|Costs||About $2,500 to $3,500 for attorney fees. 11% of your total payments go to Trustee fees.||Depends on the Debt Settlement Provider|
|What if your income increases||If your income goes up, you must increase your payments. If you get a big tax refund or other unexpected bonus, that must be paid to the Trustee||You are in control of your income.|
|Effect on Creditor Harassment||Creditors must stop all phone calls and collection letters when notified that you have filed a Bankruptcy.||Creditors are required by law to stop phone calls when notified that you are represented by an attorney. Sometimes they ignore the law and continue to call anyway.|
|Information you must provide to Creditors||You must provide full and detailed information on every aspect of your financial life when you file a Bankruptcy. You will placed under oath and will be questioned by the Trustee, and by any creditor who wants to question you.||Your attorney will provide any creditor with only the information he deems necessary in order to settle your debt.|
|For how long do you pay?||3 years if your income is below the state median. 5 years if it is above.||Decided upon by you and your Attorney. The average plan is for 3 to 4 years.|
|How Much Are Creditors Paid?||Depends on your monthly payment. Can be anywhere from 1% to 100%||The target, and the average is about 50% of the principal.|