Filing bankruptcy is something you would normally not look forward to. However, you might eventually see bankruptcy filing as the best way to deal with your financial problems and have a fresh start.
If you are planning to declare bankruptcy, you need to look into the specifics of the different types of bankruptcy. You can consult a bankruptcy attorney to help you decide what is best for you.
Chapter 7 and Chapter 13 bankruptcy are usually explored by people looking into bankruptcy protection. In this article, we will differentiate the two as specified in bankruptcy laws. Specifically, we will look into how they can protect you from creditors through ‘automatic stay’. The two bankruptcy types mentioned provide different protections while you’re bankrupt.
What is Automatic Stay?
The federal law that essentially disables your collectors from harassing you when you file for bankruptcy protection is called the automatic stay. Through this, almost all debtor attempts for collection will be prohibited as soon as you begin the bankruptcy process. This applies regardless if you opt for Chapter 7 or Chapter 13.
Choosing Chapter 7 Bankruptcy
When you decide to file for bankruptcy under Chapter 7, no collector will be allowed to collect or even contact you for what you owe them. This is in effect throughout the course of your case, which could take three months, more or less. At the end of this period, the bankruptcy court will proceed with the discharge order, which would technically write off your debts. This order could cover most or even all of your liabilities from creditors. In this regard, automatic stay protection will no longer be necessary.
There is a caveat, however. Following the bankruptcy law, it is possible that not all debts are included in the discharge order. Recent unpaid income taxes, for example, can’t be discharged. Additionally, certain debts may be discharged but you still have to repay if you want to keep your house, vehicle, or other collateral. The order does not remove the liens against your property.
After all paperwork for your Chapter 7 case has been finalized, you have to deal with debt settlement. The automatic stay will no longer provide protection, but such may not be needed anymore.
For unpaid income taxes, an installment agreement and on-time monthly payments are usually enough to ‘protect’ you from collection authorities. For secured debts, on the other hand, a reaffirmation agreement and on-time repayment installments will prevent your creditor from repossessing your house, vehicle, or other property. Avoiding foreclosure is a common reason why some opt to declare bankruptcy.
Choosing Chapter 13 Bankruptcy
If you decide to declare bankruptcy under Chapter 13, you will be protected from debtors for a much longer period of time, up to three or even five years. This is because the automatic stay protection following the bankruptcy code is in place until the end of the case. While there is protection for around three months under Chapter 7, filing under Chapter 13 often keeps you protected from all lenders for much longer.
For unpaid income taxes, a Chapter 13 case would allow you to opt for a longer and more flexible installment plan with payments lower than what’s usually required. Additionally, you may not pay taxing authorities until after several months or even two years, enabling you to pool your finances and settle more important debts first. As long as you pay off what you owed within five years, you will be protected from any tax collection and tax penalties or fines.
For secured debts, you would usually have years to settle your account. As long as you follow the payment plan approved by the court, creditors cannot require you to immediately pay-back what you owe if you want to keep the collateral.
Which Case to File?
Choosing the right type of bankruptcy is crucial. A bankruptcy lawyer can explain these in detail. In either bankruptcy type mentioned above, you are protected through automatic stay as soon as bankruptcy is declared.
If you file a Chapter 7 case, you will be protected for around three months. After this, you either skip the debt-relief process entirely or you would have had enough time to work things out financially and wipe out your debts.
On the other hand, a Chapter 13 case will not clear off all your debts but its automatic stay protection allows for more flexibility and is in effect for longer.
The decision to file personal bankruptcy or business bankruptcy is often the best way to deal with financial hardships. A trusted law-firm will help you prepare bankruptcy forms and pertinent paperwork. Get an attorney with years of experience in bankruptcy filings, such as Daniela Romero from Pasadena Bankruptcy Law. Get bankruptcy information on our website and avail of a free legal consultation here.