Filing for bankruptcy is a way to deal with mounting debts you can no longer manage. But once you’ve opted for this approach to wiping out debts, there are limits surrounding when you can file again. If you’ve used Chapter 7 bankruptcy specifically to discharge debts in the past, you must wait eight years before filing another Chapter 7 case.
But that doesn’t mean you’re out of options if you’re sinking under mounting debts once again. Chapter 13 bankruptcy, often referred to as a wage earner’s plan, is another potential route to take, and you only have to wait four years to file after filing Chapter 7.
What is Chapter 13 bankruptcy?
Chapter 13 bankruptcy is a way to reorganize your debt. It involves repaying none, some or all of your debt over the course of three to five years.
With Chapter 13, most or all of your creditors are lumped together into one large pool. Then you make payments each month to a lawyer who’s assigned to your case, called a trustee. The trustee distributes your payment to the creditors.
“In Chapter 13, you can reduce the amount owed on secured loans, reduce interest rates, re-amortize loans for a lower monthly payment, remove certain liens, extend the time to pay back taxes, reduce the amount owed on unsecured loans sometimes down to zero, and legally break leases,” says attorney Dai Rosenblum of Dai Rosenblum Bankruptcy. Because a Chapter 13 can extend up to five years, he says that many people use it to get caught up on their mortgage.
When you proceed with a Chapter 13 case, you must file a plan detailing how some or all of the debts will be repaid over time. In addition, you or your attorney, in conjunction with the trustee for your case, will determine a reasonable amount that you can afford to pay back to creditors. That amount is based on your assets, monthly income and monthly expenses.
What is Chapter 7 bankruptcy?
Chapter 7 bankruptcy allows you to become debt-free through what’s often referred to as a liquidation process. When using this approach, your debt is discharged, but your non-exempt property is typically sold, with the proceeds distributed to creditors.
Though it varies by state of residency, personal possessions that may be considered non-exempt and thus sold to cover your debts could include your home, pension, car, personal belongings, coin collection and even jewelry.
However, it’s important to note that there are what’s known as property “exemptions” under Chapter 7. “Exemptions in bankruptcies are like deductions in taxes,” says bankruptcy attorney Edward Hanratty. “The debtor values everything they own, based on what it would sell for and that’s the value of the property. If the value is less than the exemptions allowed, the debtor keeps the stuff.”
Each state has a set of its own exemptions, and in some cases you’re allowed to choose between your state exemptions and federal bankruptcy exemptions laid out by Congress.
How often can you file for bankruptcy?
The frequency of applying for bankruptcy depends on which type of bankruptcy you’re filing. Here’s a breakdown:
- Filing Chapter 7 after Chapter 7: eight years.
- Filing Chapter 13 after Chapter 7: four years.
- Filing Chapter 13 after Chapter 13: two years.
- Filing Chapter 7 after Chapter 13: six years.
However, there are important exceptions to be noted, says Richard Symmes of Symmes Law Group. For instance, if no discharge of debts was ultimately received when you first filed for Chapter 7, then you may be able to refile another Chapter 7 case prior to eight years and still receive a discharge.
Filing for Chapter 13 after filing Chapter 7
If you file Chapter 13 four years after filing Chapter 7, you can have a very low monthly Chapter 13 payment plan and receive a full discharge of all remaining balances after you complete the three- to five-year plan. For example, you could pay as little as $100 a month for three years inside a Chapter 13, paying very little to your creditors and yet still discharging the remaining balances owed.
The benefit of Chapter 13 is that you do not have to pay all of the debts. The court can force creditors to accept altered repayment terms or terms that are different from what your original mortgage note or other agreement was before Chapter 13 was filed, says Hanratty.
One of the most common reasons to file Chapter 13 after having filed Chapter 7 is to deal with unpaid taxes, says Rosenblum. If you rid yourself of all debts that were dischargeable through Chapter 7 but still cannot afford to pay back taxes that were not dischargeable, Chapter 13 will give you five years to pay those taxes. You may also use those five years to pay back things like student debt or alimony arrears that were not discharged in your Chapter 7 case.
The bottom line
Bankruptcy can be a reasonable approach to resolving mounting debts that you cannot handle, but keep in mind that this approach does not discharge or eliminate all kinds of debt.
Alimony and child support, for instance, are not dischargeable through the bankruptcy process, nor are income taxes that are less than three years overdue. And student loans, one of the most significant debts Americans face, are also not dischargeable.
It’s also important to understand that there are benefits and drawbacks associated with each of the various bankruptcy options, so consult a bankruptcy adviser before determining whether to file Chapter 7 or Chapter 13.
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