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A look at Chapter 13 and Chapter 7 bankruptcy

When someone is behind on his or her loan payments and has creditors calling at all hours threatening to repossess a vehicle or foreclose on a home, the best option may be to file for bankruptcy. Two forms of bankruptcy are generally available to individual filers: Chapter 13 and Chapter 7 bankruptcy.

Bankruptcy is a legal process through which debts are forgiven to give filers a fresh start. Under Chapter 13 bankruptcy, filers develop a repayment plan and after making payments on time over three to five years, have the rest of their debts forgiven. Those who are unable to make any payment on their debts may be eligible for Chapter 7 bankruptcy, under which assets are sold to repay creditors, then the remaining debts are forgiven.

Filers are typically eligible for either Chapter 13 or Chapter 7 bankruptcy. In Virginia, those who make more than state median income, or $85,546 in 2012, qualify for Chapter 13 but not Chapter 7 bankruptcy, while those who make less than the state median income may file for either. To be eligible for either type, filers must complete credit counseling in the 180 days prior to filing for bankruptcy.

The state of Virginia allows filers to keep some essential property free and clear during the bankruptcy process. This includes $1,000 worth of clothing, $5,000 worth of household goods, $10,000 in tools and equipment for work or school, up to $6,000 in equity value in a motor vehicle and $5,000 in other property if it is listed on a Homestead Deed filed with a court. Any other property can be liquidated during bankruptcy proceedings.

Chapter 13 bankruptcy

When someone files for Chapter 13 bankruptcy, also known as the wage earner’s plan, he or she works with a court-appointed bankruptcy trustee to develop a repayment plan for his or her debts. For a filer to qualify, his or her creditors must get back at least as much as they would if the filer were eligible for Chapter 7 bankruptcy.

To be eligible for Chapter 13 bankruptcy, filers must earn a steady income and have less than $360,475 in unsecured debt, or debt for which there is no physical collateral, and less than $1,081,400 in secured debt, such as a mortgage or car loan.

Once a repayment plan is developed and approved by creditors and the court, filers make payments to their bankruptcy trustee, who then distributes the payments to creditors. Typically, filers may keep property for which they are making payments, including their homes and cars.

After three to five years of timely repayment, the rest of the filer’s dischargeable debts are forgiven and the process is complete, though the bankruptcy will remain on the filer’s credit report for ten years.

Chapter 7 bankruptcy

Chapter 7 bankruptcy is meant to be a fresh start for those deeply in debt and unable to make payments. Under Chapter 7 bankruptcy, a filer’s assets are liquidated to pay back as much of the debt owed to creditors as possible. After these payments are made, the remaining dischargeable debts are forgiven.

Filers of Chapter 7 bankruptcy lose property such as their homes and vehicles. However, it is possible to reaffirm the debt by promising a creditor repayment despite the bankruptcy, or to redeem the property by paying the creditor the fair market value of the property.

After the bankruptcy process is complete, the bankruptcy stays on a filer’s credit report for ten years.

Other considerations

There are two more important considerations to make when deciding to file for bankruptcy. First, some debts cannot be discharged. These include back taxes and those owed due to tax evasion, fines and restitution, child support debt, alimony debt, debts from fraud or other wrongful or harmful acts, loans from a pension plan and student loan debts unless the filer can show extreme hardship.

Lastly, an important benefit that bankruptcy provides to filers is the automatic stay. Once someone files for bankruptcy, all collection efforts must stop, including foreclosure proceedings, utilities being cut off, repossession of property, wage garnishment and in some cases eviction.

If you or a loved one is considering bankruptcy, please speak with an experienced bankruptcy attorney who can help you determine which type of bankruptcy is most appropriate for your circumstances.