Recent changes to bankruptcy laws have made it more difficult for many individuals to qualify for Chapter 7, which is now designated for those whose debt burdens are equivalent to their state's median income. When this occurs, you may only be eligible for debt relief assistance under a Chapter 13 repayment plan, as opposed to debt elimination under Chapter 7.
The Distinctions
In Chapter 7 bankruptcy, you can petition for complete debt elimination, which means that your debts will be eliminated through (a) the creditor writing off the debt as a loss or (b) the creditor obtaining a partial debt payment through the liquidation of assets. In either case, Chapter 7 offers debt relief to those who cannot afford to repay their debts via a structured payment plan.
Chapter 13 allows you to negotiate and repay your debts over three to five years. The court develops and approves a repayment plan based on the quantity of debt you are able to pay. Once the court approves the plan, your creditors will have limited options for collecting debts. They must instead accept the debt payments specified in the Chapter 13 plan.
The Advantages
Certain categories of debts may be eligible for a debt reduction under a Chapter 13 plan. Unsecured debts, such as credit card balances and medical bills, can be readily negotiated down to a fraction of the original amount owed. Secured debts, including a mortgage or auto loan, cannot be reduced and must be repaid in full. However, through a Chapter 13 repayment plan, secured debt assets are better protected from liquidation.
Repaying debts through Chapter 13 allows you to retain ownership of your property and shield your assets from creditors. In Chapter 7 bankruptcy, you may be required to surrender certain assets to satisfy your debts. Once the debt has been repaid, you will be able to acquire the asset.
Chapter 13 also provides greater credit protection than Chapter 7. The preponderance of credit damage is incurred before filing for bankruptcy. However, creditors are more likely to report positive information for those who have completed a repayment plan after having satisfied their debts through repayment. Future creditors are also more likely to view someone favorably if they have repaid their debts as opposed to having them eliminated.
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