Every household in the United States understands the delicate balance when it comes to financial health. While debt is not necessarily bad, too much debt can leave a family struggling to get back to a state of financial stability. The debts begin to squeeze them dry, hurting their credit scores, leaving them with little to nothing to live on, and causing horrific consequences such as the bank repossessing vehicles or their home.
While the term bankruptcy sounds intimidating, it is an extension of grace by the United States government to help individuals and families get back on their feet. It puts a stop to creditors calling to collect debts and helps eliminate certain debts to ease the pressure on the family. This gives them the chance to start fresh and provides them with the tools and knowledge to make better decisions going forward.
Unfortunately, not all households or individuals will qualify for bankruptcy. Different types of bankruptcy have different debt limits that apply, disqualifying some for the relief they seek. The team at Alison Grant, Attorney at Law, has created this guide that outlines the debt limits for Chapter 7 and Chapter 13. Here is what you need to know:
What Is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy, also known as liquidation bankruptcy, is a type of bankruptcy that aims to clear away certain unsecured debts. For individuals who are falling way behind on their bills and don’t have the financial means to afford both monthly payments on those debts and living expenses, filing for Chapter 7 bankruptcy may be their best option. However, it is important to note that there are consequences for filing Chapter 7 bankruptcy, such as the court taking legal possession of certain property and taking a major hit on your credit score.
How Does Chapter 7 Bankruptcy Work?
When an individual or family files for Chapter 7 bankruptcy, the court places an automatic temporary stay on their current debts. This prevents creditors from collecting or attempting to collect payments. It also pauses the garnishment of wages, foreclosing on the individual’s or family’s home, the repossession of their property, eviction from a rental property, or the turning off of utilities. The court will then take legal possession of all property and appoint a bankruptcy trustee to the case.
The bankruptcy trustee is in charge of reviewing the individual’s assets and overseeing their Chapter 7 bankruptcy case. They will sell certain properties individuals seeking bankruptcy cannot keep and use the proceeds to repay the creditors. The trustee is also in charge of arranging and running a meeting between the individual filing for bankruptcy and the creditor. This is known as a creditor meeting and it involves going to a courthouse and answering questions about the individual’s filing for bankruptcy.
At the end of the bankruptcy process, the court will discharge the remaining debts, (which means the individual will no longer be responsible for paying them off). However, some debts, such as child support and alimony, will not be dischargeable, meaning the individual is still responsible for paying those.
Are There Debt Limits to Chapter 7 Bankruptcy?
Under Chapter 7 bankruptcy, there is no maximum amount of debt that would disqualify an individual from seeking it out. However, for low-debt-owing cases, the debtor must determine if filing for Chapter 7 bankruptcy will provide enough benefit to be worth it. This is because Chapter 7 bankruptcy carries the following consequences:
- The debtor will be required to pay the costs of filing.
- They may have some of their possessions sold off and the proceeds used towards the debt.
- The bankruptcy will be visible on their credit report for 10 years.
What Is Chapter 13 Bankruptcy?
Chapter 13 Bankruptcy, also known as the wage earner’s plan, refers to the proceeding in which the debtor undertakes the reorganization of their finances under the supervision and approval of the court. Debtors must submit and follow through with the plan to repay any outstanding creditors within three to five years of filing for bankruptcy.
In most circumstances, the repayment plan has to provide a substantial payback to the creditors. This usually means that they would get an equal amount of what they would have received under other forms of bankruptcy. This repayment plan could cause the debtor to pay 100% of their disposable income towards the repayment of their debt.
How Does Chapter 13 Bankruptcy Work?
In a Chapter 13 bankruptcy case, the debtors must compile a list of all creditors with the amount of money owed to each, a list of any property they own, and information about their income amounts and sources, along with a detailed list of their monthly expenses.
Next, the debtor will pay an agreed-upon monthly amount to an appointed, impartial bankruptcy trustee. This is done to consolidate debts into one monthly amount. The trustee will then distribute the money to the creditors. This is to keep the debtors from having to have direct contact with the creditors and protect them from further harassment under Chapter 13 Bankruptcy Protection.
Is There a Debt Limit to Chapter 13 Bankruptcy?
Unlike Chapter 7 bankruptcy where there was no set debt limit, Chapter 13 bankruptcy does have one. Any individual, whether they are self-employed or operating an unincorporated business, is eligible for Chapter 13 relief as long as the individual’s combined total secured and unsecured debts are less than $2,750,000 at the date of filing.
It is important to note that an individual will not be permitted to file under Chapter 13 bankruptcy or another chapter, if during the proceeding 180 days, a prior bankruptcy petition was dismissed because the debtor willfully failed to appear before the court. This is also true if they willfully decide not to comply with the orders of the court or were voluntarily dismissed after the creditors sought relief from the bankruptcy court to recover property that they held on liens.
Need Help Deciding Which Bankruptcy Route Is Right for You?
Bankruptcy is an incredible option for individuals who have run out of other paths. If you are facing an impossible uphill battle against your debt and the debt collectors, filing for bankruptcy could give you the chance to reset your financial situation and find stable ground. The team at Alison Grant, Attorney at Law can help you get back on your feet by guiding you through the bankruptcy process.
Alison Grant will work with you to explore all of your options, helping you find the right choice for your situation. Whether that is Chapter 7 or Chapter 13 bankruptcy or a bankruptcy alternative, you can rest easy knowing that you are in good hands. Contact us today for more information on bankruptcy or to schedule a consultation.