Chapter 7 and Chapter 13 Bankruptcy

Filing for Bankruptcy Can:

  • Stop home foreclosure/Save your house
  • Stop car repossessions
  • Stop wage garnishments
  • Stop lawsuits
  • Eliminate credit card debt
  • Eliminate medical debt
  • Stop creditor harassment
  • Stop evictions
  • Protect your security clearance
  • Eliminate certain tax debt
  • Cancel contracts and leases without termination fees
  • Remove 2nd mortgages in certain circumstances
  • Reduce vehicle payoffs and interest rates in certain circumstances

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Chapter 7 Bankruptcy (Personal and Business)

In a Chapter 7 Bankruptcy, most (or all) of your debt is eliminated. This includes credit cards debt, medical bills, personal loans, foreclosure and repossession deficiencies, utility bills and some tax debt. Chapter 7 can be used to surrender houses and vehicles without having to pay the remaining balances owed. 

Most people do not lose any property in Chapter 7 Bankruptcy. Each person who files for Bankruptcy can exempt up to $12,000 worth of equity in property. The exemptions are used to protect household belongings, jewelry, tools, hobby equipment, equity in vehicles, etc. There is also a homestead exemption in the amount of $21,625 that can be used to protect equity in your home. Note that the exemptions are not necessary for property encumbered by liens. For example, if you have a vehicle with a Blue Book value of $20,000 that has a loan balance of $22,000, then there is no equity in the vehicle. Therefore, the exemptions are not needed to protect the vehicle. So long as you remain current on the payments, you will be able to keep the vehicle.

If you have a vehicle with a Blue Book value of $10,000, and a loan balance in the amount of $8,000, there is $2,000 worth of equity in the vehicle. By using your exemptions to protect the $2,000 in equity, you get to keep the car. Note that in order to keep the car, you must stay current on the car payments. 

Chapter 13 Bankruptcy

STOP FORECLOSURE BY FILING CHAPTER 13 BANKRUPTCY. Chapter 13 is a payment-plan Bankruptcy. It is designed to allow you to keep your property, while paying your creditors at least a portion of what they are owed. One of the most common uses of Chapter 13 is to pay back past due payments on mortgages and car loans. For example, if you are $10,000 behind on mortgage payments, filing a Chapter 13 will give you up to 5 years to pay back the $10,000. Through this process, you will be able to keep your home and vehicles.

Unsecured creditors, such as credit cards and medical bills, only get paid a percentage of what they are owed in a Chapter 13. That percentage is based on what the Court determines you can afford to pay. At the end of the Chapter 13, whatever is left owing on the unsecured debt is eliminated, just like in a Chapter 7.

There are other advantages to a Chapter 13 Bankruptcy, including:

Stripping a Second Mortgage Off of Your Home: If the balance on your first mortgage is more than the value of your home, you can strip a second mortgage off of the home. The balance owed on the second mortgage then becomes an unsecured debt. The second mortgage lender will then only get paid the same percentage as the other unsecured creditors.

Reducing the Pay-Off and Interest Rates on Car Loans: If your car was purchased more than 2.5 years before filing a Chapter 13, you can reduce the loan pay-off amount to the fair market value of the vehicle. Even if the car was purchased within 2.5 years of filing the Chapter 13, you can still reduce the interest rate on the car to around 4.75%. In either scenario, the new amount and interest rate that is determined to be owed on the loan is spread out over the life of the Chapter 13 Plan. For many people, the monthly payment on the car loan is more than cut-in-half by using this method.