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What are the different types of bankruptcy?
What is the difference between a chapter 13 and 7?
What about: credit rating and getting credit?Filing for bankruptcy is not a decision to be made lightly or without thorough investigation. This is a decision greatly influenced by the amount of debt you owe and your ability to make payments to your creditors. Anyone considering filing for bankruptcy protection should investigate all possible options that may be available before deciding on bankruptcy. This pamphlet is only an overview and will not provide all of the answers a debtor may need or want when considering bankruptcy as an option. However, it may provide answers to some general questions regarding the bankruptcy process. Anyone considering bankruptcy should speak with an attorney who is familiar with or specializes in bankruptcy for specifics and a greater explanation of the law.
What is bankruptcy?
Bankruptcy is a legal proceeding under federal law that allows a debtor who is having serious financial difficulties to obtain financial relief. Bankruptcy allows debtors to either eliminate their debts or repay them under the protection of the bankruptcy court. A debt may be either secured or unsecured. Secured debts are those that have collateral attached to them such as your house or car. For
example, if you obtain a mortgage on your house, your house is considered collateral for your loan/debt. In the event your loan is not paid back, the lender may foreclose or repossess your property (the collateral) to recover the owed money. Examples of unsecured debts are credit cards, medical bills or anything else that is not attached/secured by collateral. Bankruptcy cases are administered by the federal bankruptcy court system.
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A Chapter 7 bankruptcy, also known as a liquidation, allows a debtor to eliminate or discharge (forgive) all or some of his or her unsecured debts. Anyone, even a corporation, can file a Chapter 7 bankruptcy case. A Chapter 7 case will also allow a debtor to surrender secured property back to the creditor if the debtor can no longer afford to keep it. On the other hand, if a debtor can afford to keep his or her property and that property does not have excessive equity, then it can be retained by reaffirming the debt with the creditor. Once a secured debt is reaffirmed, payments on secured debt will continue pursuant to the terms of the contract. Upon the filing of a Chapter 7 bankruptcy, a trustee is appointed to preside over the case and determine whether there are any nonexempt assets to liquidate for the benefit of creditors. Thus, if a trustee determines that your asset (for example your car or home) has equity and you cannot exempt this equity under Georgia law, then the trustee can sell your asset and pay your unsecured creditors with the proceeds from this sale. For debtors with higher incomes that do not qualify for filing a Chapter 7 bankruptcy, a Chapter 13 bankruptcy can be filed.
A Chapter 13 bankruptcy, known as a "Wage Earners Plan," allows a debtor to protect valuable assets and also assist a debtor who has fallen behind on his or her mortgage or car payment to catch up on those payments through a reorganization plan. In this plan, a debtor proposes to pay back his or her creditors over a period of time. The plan is presented to a bankruptcy judge for approval and upon approval is administered by a Chapter 13 trustee. The Chapter 13 trustee collects and distributes funds paid by the debtor to all of his or her creditors based on the plan approved by the Bankruptcy Court. Payments on long-term debt (for example, a mortgage on a home being retained) must continue at their contract rate after the filing, in addition to the Chapter 13 plan payment.
A Chapter 12 bankruptcy is similar in nature to a Chapter 13, but is restricted to those individuals who earn their living from farming or fishing.
What is the difference between Chapter 7 and Chapter 13?
A chapter 13 is used to repay debts and keep the property that you owe money on. A correctly filed chapter 13 will give you reduced payments while you keep the property. The chapter 13 payments are based on your income, monthly expenses and the different debts that you owe. The chapter 13 is binding on the creditors and does not require, like a chapter 7 does, that payment arrangements be on the creditors terms. Some debts can be paid as low as 1% on the dollar, while other debts like child support, most tax debts, student loans and others will have to be paid back at 100%. Chapter 7 is used to discharge, or "wipe-out", debts. However, child support, most taxes, student loans and a few others cannot be discharged. But most of the normal debts that a person has incurred can be completely discharged. Any property that you are buying and still owe money on will need to have payment arrangements made directly with the creditor, or you may simply surrender the property and owe no money. A Chapter 7 will stop garnishments, lawsuits and phone calls and letters from creditors.
A few things you can do to help your credit rating.
1. If you don't have one - open a checking or savings account. Keep it clean, no overdrafts.
2. Pay your utility bills on time. This is important. Phone bill, water bill, gas and electric. Paying these bills late will hurt.
3. Pay mortgage / rent on time.
4.You need to limit the number of "inquiries" reported to your credit report. Each time an inquiry is made it can lower your credit score. An inquiry with no credit being approved can look like
a denial to other creditors.
5. If you get a charge card then limit the use. One card will help - but several will hurt. Don't give a new creditor something to worry about, and charge card debt always worries a new creditor.
6. You should strongly consider getting a secured credit card, maybe two. Use them every week but never go over your credit limit.
7. The longer you wait the better chance of getting a decent interest rate on automobiles.
8. Read the How to Bounce Back After Bankruptcy article.
9. Time. The bankruptcy ends your old credit cycle and starts a new time period. If you had to file bankruptcy then most, if not all, of your creditors were already posting harmful information
on your credit report and damage had already been done. Bankruptcy brings closure to what happened before you filed.
10. If you try to move to quickly to obtain credit you will be taken advantage of with a high interest rate.
11. Credit reports are read differently by different people. But - what is not shown can be helpful. Such as no entries for late rent or utility bills. See #2 and #3 above. Paying on time may
not appear, but paying late will. Creditors know this.
In all honesty you must ask yourself what will happen, or has already happened, to your credit if you stay in your present situation. However, your credit rating is viewed differently by different creditors. It is an opinion of your repayment ability at the time you are applying for credit. Your past history is only one of several factors used by creditors; other factors are your income, expenses and length on the job. For example, some mortgage companies may require that you wait 24 months from your Chapter 7 discharge before giving you a mortgage. However, the a mortgage company may only require that you be in your Chapter 13 case for 12 months or longer before applying for the mortgage, even though your Chapter 13 is still going on. Automobile creditors usually do not require as long as mortgage companies. But no matter when you apply for credit, your ability to pay the debt is important. The main question will always be "Is what you make, spend and have left each month good enough for the creditor to extend credit?" You must be honest with yourself when you go to get credit while still in a Chapter 13, or after a Chapter 7 or Chapter 13. You should only try to get credit for something that you can repay without straining your household budget. The first time you apply for credit will usually be the most difficult because of the lack of a credit history. We supply our Chapter 13 clients with a Trustee print out that shows all of the Chapter 13 payments they made while in their repayment plan. This lets a creditor know that the client is able to make payments to them month after month.But creditors still depend heavily on how long you have been employed and what other monthly expenses you have to pay.
Also, there is no waiting period. There is no such thing as having to wait for 5 years, 7 years or any length of time. Be reasonable and give it a few months before trying to make a major purchase. Where some mortgage creditors may require 24 months, others may not. And where some auto creditors may require 12 - 14 months others may only require 1 - 3 months. Just don't allow yourself to be taken advantage of, if the interest rate sounds to high then it probably is. Don't be fooled by the line "we're the only creditor that will give you credit". You will probably pay more interest than someone not coming out of bankruptcy, but that does note mean you have to take whatever a creditor offers. Look around if you need to, don't be mislead and don't be taken advantage of. You have leverage to use. Since you
filed a bankruptcy case your debt has been eliminated or reduced. Use the bankruptcy filing to your advantage, don't ignore it. The biggest mistake people make when trying to get credit after bankruptcy is that they will not shop around and compare the creditors. If you have income, and you don't owe any, or much, debt then you are bringing something to the table. Income and debt ratios are important to creditors. Don't be mislead and taken advantage of. Go somewhere else if you have to. And never go to a title pawn creditor - never.
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