Factors To Consider When You Qualify For Both Chapters Of Bankruptcy
For many people struggling with debt, their income or prior bankruptcy filings only give them one option for which chapter of bankruptcy to file. But if it has been at least 8 years since your last filing and your income falls within a certain range, you actually may qualify for both Chapter 7 and Chapter 13. Each has their own benefits and advantages, so you will need to select the chapter you file carefully based on your goals. For more help with your decision, as well as to confirm your qualification, call our firm for your free consultation.
Are Your Assets Protected?
A major concern when deciding which chapter to file will be whether your assets are exempt in a Chapter 7 bankruptcy. Every state has its own bankruptcy exemptions, or limits on the equity in different asset categories. Some states allow debtors to use federal exemptions as well, but Arizona is not one of those states. In a Chapter 7 bankruptcy, the bankruptcy trustee can seize and sell any nonexempt assets and contribute the proceeds to the bankruptcy estate. If you have nonexempt assets, they will generally be safe from the trustee and your creditors in a Chapter 13 bankruptcy.
The two most common assets that can be nonexempt and cause someone to opt for Chapter 13 are houses and cars. In Arizona, the homestead exemption is $150,000. The motor vehicle exemption for an individual is $6,000. For married couples, this increases to an exemption of $12,000 for one vehicle or $6,000 each for two vehicles. If you have more equity in these assets than is exempt, you should consider speaking with an Arizona bankruptcy attorney to see if Chapter 13 would be your better option.
Once you file bankruptcy, the Automatic Stay is triggered and typically lasts until your case is discharged or dismissed. The Automatic Stay provides comprehensive creditor protection, stopping foreclosures, wage garnishments, bank levies, repossessions, utility shutoffs, evictions at certain phases, and more. But the Automatic Stay also freezes your credit, and you won’t be able to use credit cards or open new credit card accounts while your bankruptcy is active. It will be more difficult to finance a vehicle, and you will be disqualified from home mortgages for 2 years after filing. You will need permission from the judge to buy new assets during a Chapter 13 bankruptcy. So before you decide which chapter to file, you need to determine how long each type will last, and if you’re ready for that level of commitment.
A Chapter 7 bankruptcy typically lasts about 3-6 months from the initial filing to discharge. A Chapter 13 bankruptcy payment plan lasts either 3 or 5 years. If you make less than the state median income, your plan will last 3 years. If you make more than that amount, your plan will last 5 years. The difference between months and years is highly significant- discuss your situation with an Arizona bankruptcy attorney if you need to confirm how long your Chapter 13 payment plan would be or have additional questions about what you can and cannot do while in an active bankruptcy.
Stopping Foreclosures & Repossessions
The Automatic Stay only provides protection from foreclosures and repossessions for the lifespan of the bankruptcy. If you don’t deal with your past-due balance during your bankruptcy, the creditor can proceed with repossession after your case is discharged. So if you are a few months behind on your mortgage, you may not be able to catch up your balance in arrears in the few months that a Chapter 7 bankruptcy provides. Your arrearage will be worked into a Chapter 13 payment plan, so your past due amount will essentially be spread out over 3-5 years. If you successfully complete a Chapter 13 payment plan, your creditors won’t have cause to repossess your assets, and you may even pay them off in full in your plan.
Junior Mortgages In Chapter 7 & Chapter 13 Bankruptcy In Arizona
Because many, if not all, of your debts are repaid in a Chapter 13 bankruptcy, there are some unique benefits it offers that Chapter 7 does not. One of these is the opportunity to discharge junior mortgage(s) on your home. This process is known as lien stripping. To use lien stripping, you must owe more on your senior mortgage than the home is worth. If so, any second, third, etc. mortgages on your home will be treated like credit cards, medical bills, and other unsecured debts in your payment plan. That means that they are the last category to be paid, and will only be paid to the extent that your disposable monthly income allows. Depending on your debt structure, you may pay little to nothing on your unsecured debts in a Chapter 13 payment plan. But if you have a secondary mortgage on your home and file Chapter 7 bankruptcy, that junior mortgage will be treated as a secured debt, and not be discharged.
Credit Implications Of Filing Chapter 7 Or Chapter 13 In AZ
One major concern many of our clients have is how bankruptcy will affect their credit scores. As mentioned above, you will be disqualified from home mortgages for 2 years after filing either chapter of consumer bankruptcy. But in a Chapter 13 bankruptcy, you will still have 1-3 years left in your payment plan when that 2 year mark passes.
In general, filing either type of bankruptcy will damage a healthy credit score, but many people filing bankruptcy don’t have ideal credit. If you have an average credit score before filing your bankruptcy petition, you may see very little effect on your score upon filing. If you have a low score, you might actually see a slight improvement in your score after filing your bankruptcy petition. However, you may experience different long-term effects on your credit in Chapter 7 and Chapter 13. Because debts are repaid in Chapter 13 bankruptcy, future potential lenders will usually view it more favorably in applications for lines of credit. A Chapter 7 bankruptcy will remain on your credit report for 10 years from the filing date. A Chapter 13 bankruptcy will remain on your credit report for 7 years.
Child Support Wage Garnishments
Child support isn’t dischargeable in bankruptcy, and filing Chapter 7 bankruptcy won’t stop a child support wage garnishment. In fact, child support wage garnishments are exempt from the Automatic Stay unless you file a Chapter 13 payment plan that arranges for full repayment of your balance in arrears. But if your wages are being garnished for an unsecured debt like credit cards or a personal loan, a Chapter 7 bankruptcy will stop your garnishment and discharge the debt with no repayment.
Contact Chapter Bankruptcy Lawyers In Arizona For Assistance
Do you need more assistance deciding which bankruptcy chapter you should file? Learn more about the benefits and drawbacks of each chapter of bankruptcy from the convenience and privacy of your home with your free phone consultation. Our experienced Arizona bankruptcy lawyers offer affordable rates, same day appointments, and emergency filings. We also offer payments starting as low as Zero Dollars Down. To get started, contact us or use our online form to schedule your free consultation today.