Chapter 7 And Chapter 13 Of The USA Bankruptcy Code

June 25, 2009 by Julio
Filed under Bankruptcy

Many people believe that filing for bankruptcy under Chapter 7 or Chapter 13 of the Bankruptcy Code is their only option when they feel burdened with debt. If they have more debts than just falling behind in their mortgage payments, such as unpaid credit card debts, then they might well be right, but if you are in that situation then are advised to first get professional advice before filing, because once you have done so there is no turning back.

Although bankruptcy cases are filed and tried under federal law, some property rights such as exemptions come under state law. Exemptions are what protect your property from creditors, and can have a significant part to play in bankruptcy cases, so it is not always safe to generalize, but the following is basically true across the USA.

Chapter 7 involves liquidation of assets, and is preferred where you have equity on your home and several other debts, such as secured or unsecured loans and credit card debts. This involves the sale of your home and also of other non-exempt properties you own to make initial payment to the secured debts, and the remainder is shared between your unsecured creditors. The remaining debt, particularly of unsecured debts such as credit cards, are written off, although there are some exceptions about which a professional adviser can advise you.

However, if you have no assets at all, and you have no equity on your home once the secured debts have been considered, you are able to keep your home as long as you are able to meet the repayments on the secured debts. That is because foreclosure would provide nothing to the unsecured debtors, and you are already paying you secured debts at the agreed rates, so foreclosure would achieve nothing.

If, however, you have equity, then the home will be sold to provide some capital to share between your other debtors once the mortgage and other secured loans are paid off. Let’s consider an example.

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If your home is currently valued at $150,000 and the balance of your mortgage is $130,000 and you took out a secured loan of $25,000 for a new kitchen and outside barbecue area, and it would cost around $2,000 to sell your home, your equity is zero: even less than zero, making it negative. However, let’s assume that you have also extended yourself on your credit cards, owning $20,000 on these.

You are managing to meet your mortgage and loan repayments, but cannot pay your credit card demands. You can file for bankruptcy under Chapter 7 and keep your home, having your credit card debts scrubbed. You can keep your home as long as you keep making your payments. You can even keep $2500 in your bank account, and also your car if it is not too new with a high value.

However, if you had not taken that loan secured on your home before house prices plummeted, your equity would be $18,000 - taking the cost of selling into consideration. You would be forced to sell, and after the secured mortgage loan was paid the balance of $18,000 would be split between your other creditors. That is if the property sold for the market value, which it likely would not.

Therefore, if you have equity you lose your home, and if you have no equity you probably won’t. It’s a strange situation, but one that has been devised to make sure that you pay at least some money to your creditors if you have it. If you don’t have it, your mortgage lender would rather not foreclose due to the costs involved, and would rather come to a repayment arrangement with you. That’s the way it normally works, but there can be exceptions.

So, Chapter 7 is recommended only when you have no equity on your home, otherwise, file under Chapter 13.

Chapter 13 of the Bankruptcy Code involves reorganization, permitting the debtor to keep their home and to employ future earnings to pay off the debts. You are allowed to discuss loan modification with your lenders or come some other repayment deal.

This is your option if you have not taken that $25,000 secured loan, and have equity on your home. You can come to a repayment arrangement with your creditors, but are still not guaranteed to save your house.

That depends on your personal circumstances, and you should really make an attempt to get professional advice on your options. Chapter 7 and Chapter 13 of the US Bankruptcy Code cam help you in certain circumstances, but you need advice on which to choose, or even if bankruptcy is your best option, which in most cases it might not be.