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Greg Prosmushkin

Philadelphia Bankruptcy Lawyer

There are three chapters under the United States Bankruptcy Code that pertain to individuals and corporations: chapter 7, chapter 13, and chapter 11. Chapter 7 is usually used by businesses, while most individuals will file either Chapter 7 or Chapter 13. The easiest way to understand the difference between these two chapters is to think of Chapter 7 as a liquidation, and Chapter 13 as a reorganization.

The “liquidation” aspect of Chapter 7 means that the Bankruptcy Court is willing to write off (most) of your debts, but only if you liquidate your assets first. Not to worry, U.S. Marshals will not come knocking on your door. Chapter 7 is only a good idea for individuals who do not own significant assets, and do not have a high income. In fact, you may only file Chapter 7 if you make below your state’s average income for your family size. You should consult an attorney to determine your eligibility based on your family size and income.

There are also “reasonable expenses” and exemptions that allow most people to keep all or most of their assets when filing under Chapter 7. Vulnerable assets are new, paid-off vehicles, luxury items such as vacation homes, boats, as well as the home in which you live, if it has significant equity. If you have significant assets, and you file Chapter 7 without the aid of a competent bankruptcy attorney, you may be looking at forfeiting those assets to a U.S. Trustee before being granted a discharge.

The Bankruptcy Code allows individuals to maintain a dignified life, some savings, and even their 401(k) and still receive a discharge under Chapter 7. The bottom line with Chapter 7 is that it is a good option for individuals who do not own significant assets, such as a paid-in-full home or luxury vehicles.

Chapter 13 is often called a “reorganization,” or the “wage earner’s” bankruptcy. That is because this chapter is best suited for individuals who have an income and/or assets, but they are unable to meet their debt obligations, or they are facing foreclosure. Filing for relief under Chapter 13 gives these individuals the benefit of the automatic stay (all collection activities must cease for at least thirty days, including foreclosures and sheriff’s sales), while at the same time allowing them to repay part of their debts, and possibly discharging the rest.

Chapter 11, or “corporate bankruptcy,” is generally a reorganization of a company’s debts. It follows the same pattern as a Chapter 13 for an individual, but it has added reporting requirements, and the plan it proposes to repay its debts must be approved by its creditors before the Bankruptcy Court can condone it. Chapter 11 is also appropriate for people whose debts exceed about a million dollars.

Bankruptcy Lawyer Philadelphia

This is not legal advice, and should not be construed as such. Filing for bankruptcy can have significant consequences that should be considered with the advice and guidance of an experienced bankruptcy attorney.

Bankruptcy FAQ

How Long Will a Bankruptcy Stay on My Credit Report?

Chapter 7 stays on your credit report for 10 years, and Chapter 13 for 7 years. After those periods have expired, you may petition the credit bureaus to remove bankruptcy from your report, and they have a duty to do so within thirty days.

What Will Happen to My Credit When I File Bankruptcy?

What will happen to your credit once you file is relative to the current state of your credit. If you have defaulted debt that you are not addressing, your credit is probably already in bad shape. Your credit rating will not increase so long as you have defaulted debt (debt that you are not repaying). Upon filing, a bankruptcy may negatively affect your credit rating for a short period of time, depending on where your rating is already. What is important to remember, however, is that for most individuals with bad credit, filing for bankruptcy may be the best way to improve credit in the long term. It is true that you may not be able to get a mortgage the first two or three years after you file, and you may have higher interest rates for such things as consumer credit and vehicle loans. However, if you are responsible with your credit, you can take advantage of your fresh start and improve your credit each year. In fact, most people looking to extend credit will look at your bankruptcy filing with more forgiving eyes than a mountain of debt. If they know you have a mountain of debt outstanding, they probably won’t get repaid, but if you’ve discharged your debts, you are more likely to have room in your income to repay them.

Can I Unfile?

No, once you press “file” on a bankruptcy, it is automatically reported to the credit bureau within 24 hours, and a bankruptcy filing cannot be unfiled or removed from your report until the 7 or 10 years have passed.

This content was written on behalf of Greg Prosmushkin.