In a Chapter 7 bankruptcy, there are limits on the value of property that can be retained without payment to the trustee. In Chapter 7, you may lose a vehicle that you worked so hard to pay off, whereas in Chapter 13, you may only have to pay a small amount, if anything, to keep the vehicle. Additionally, under Chapter 13, you have up to five years to repay the debt.
Chapter 13 allows you to """"cram down,"""" or pay only the value of an item, leaving the amount of debt that is owed in excess of the property's value to be paid as an unsecured debt, typically for fractions on the dollar. You should be aware that, under the new bankruptcy law, the cram down is not available for vehicles purchased for personal use within 910 days prior to the filing of the bankruptcy case, or for other property purchased within one year prior to the filing of the bankruptcy case. Chapter 7 contains no clamp down. Either the full contract amount is paid, or the property is forfeited. The only other option in Chapter 7 is redemption, in which you pay the creditor the full value of the property in a single payment. Obviously, this is not an option in the majority of situations.
The rates of interest alter in Chapter 13. Approximately 8% interest is currently paid on secured obligations in Chapter 13. This holds regardless of the interest rate on the contract. In Chapter 7, however, the contract rate must be paid if the property is retained. This is typically advantageous for the debtor, who frequently has a high interest rate on vehicles or other secured debt. Occasionally, however, this is to the creditor's advantage. If a debtor's interest rate is 0%, it rises to 8%. Note that this does not apply to residential real estate loans, which are exempt from Chapter 13 modification.
Chapter 13 cases can finally be dismissed and refiled. This is potentially lifesaving. Frequently, I observe Chapter 7 filers who, shortly thereafter, experience a significant life event, such as a financial calamity, a car accident without insurance, a major medical problem without health insurance, or job loss. If they had filed under Chapter 13, they would have been able to dismiss the case and subsequently refile. Once a Chapter 7 petition is filed, a person is ineligible for another discharge for eight years for Chapter 7 and four years for Chapter 13.""
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