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What Is the Difference Between Chapter 7, Chapter 11, and Chapter 13?

If you are a business or individual and file for Chapter 7 bankruptcy, a trustee is appointed to liquidate your assets and distribute any excess to creditors. While debts will be discharged, if you are an individual you may have to sell some of your property if your assets exceed the exemption amount, with the proceeds distributed to your creditors. In Maryland, the exemption amount is around $12,000 for an individual. This amount is doubled for married couples filing jointly.

Chapter 11 is a reorganization. If you are a business you can operate your business while you develop a play of reorganization. Individuals are eligible for Chapter 11 and, in some cases, it makes sense to file a Chapter 11 rather than a Chapter 7 or Chapter 13.

Chapter 13 provides repayment plans for individuals with a regular income. You set up a three- or five-year schedule with your creditors. Chapter 13 bankruptcy remains on your credit report for seven years.

Is Chapter 7 Bankruptcy Right for Me?

You might be a candidate for Chapter 7 if you are a business with no prospects of reorganizing, or are an individual and have no assets to lose, like a house or a car, and if after you pay for your basic monthly expenses you have no money left to pay off debts. Chapter 7 essentially wipes the slate clean, but individuals will lose any assets exceeding the exemption amount.

There are also exemptions available to individuals efor other assets, such as bank and retirement savings accounts and property like furniture and clothes.

When Does Chapter 13 Make Sense?

Chapter 13 is typically recommended for individuals who've fallen behind on their payments on home mortgages because of a temporary problem such as a job loss, but who can get back on track if given time to catch up. After filing Chapter 13, a repayment schedule is established that provides for payment of arrears under the plan.

Can I Choose the Type of Bankruptcy I File?

The new bankruptcy rules impose requirements on individuals for filing the potentially more advantageous Chapter 7. According to the new rules, you qualify only if your average houasehold income for the past six months before filing is lower than your state's median. this is known as a "means test". Currently, a family of four must have aggregate income of less than $100,000 to qualify for Chapter 7. However, in some cases you may qualify even if you are over the means test amount. Call Jordan & Tell at (443) 535-0040 for more information.

If your income is above the state median, you will have to take the so-called means test. You won't qualify for filing Chapter 7 if you have enough disposable income to pay off $10,000 or 25% of your unsecured debt over five years. Disposable income is determined by subtracting from your income basic expenses such as housing, car payments, food and so on. Note that these aren't your actual expenses, but rather the so-called "allowable living expenses" by the IRS.

If you fail the means test, you may still ask the court to allow you a Chapter 7 filing if you have extraordinary circumstances.

Do I Have to Go Through Credit Counseling Before I File?

Yes. With your bankruptcy papers, individual Chapter 7 filers must submit paperwork certifying that you have gone through a two-hour credit-counseling session with an approved credit-counseling agency within six months before filing.

In addition, both Chapter 7 and Chapter 13 filers will have to go to a personal financial-management course in order to exit bankruptcy. This is something like traffic school and can be done in person, over the phone or online.

Are There Any Restrictions on the Kind of Debts That Can Be Discharged?

Yes. Child-support, alimony payments and past tax bills are never dischargeable. Student loans are forgiven only in rare situations. It is possible to do it only if you can prove health problems that prevent you from working.

Creditors also have the right to object to the discharge of certain unsecured debts, such as large purchases or cash advances made within 90 days of filing. And any cash advance of $750 or more taken within 70 days before filing is also considered non-dischargeable.

Can I Choose Not to Discharge Certain Debts in Chapter 7, Like a Car Loan or Mortgage?

That depends on how much equity you already have in those properties. Theoretically, you can keep a debt obligation after bankruptcy by signing a reaffirmation agreement with your creditor. With such an agreement, you're basically stating that you'll continue to make payments on the debt, even after all your other debts are written off. So, for example, if a Chapter 7 filer wanted to keep a car, he would sign a reaffirmation agreement with his auto lender and continue to make the car payments during and after his bankruptcy.

Your second option is to "redeem" the asset, which is basically buying it from the lien holder for its replacement value. The replacement value for a car, for example, will be listed in the Kelly Blue Book. In that case, of course, you would have to come up with a lot of cash.

Your third option is to surrender the car to the trustee, who will sell it to pay off the lien holder, give you the amount of the exemption and distribute the rest among your unsecured creditors.

Under the old rules, bankruptcy filers could keep making payments, and as long they were current on the loan, they could keep the asset. Under the new rules, that's no longer the case. In fact, you have to submit a special Statement of Intention along with the bankruptcy papers announcing which of the three options you choose. If you don't the creditor can repossess the asset at any time.

What Happens to My Credit After Bankruptcy?

The most obvious thing that happens when you file for bankruptcy is that you get a notation on your credit report, which is the number creditors use to evaluate your credit-worthiness, will also take a hit. Just how badly it will suffer depends in part on how high it was before you filed (scores can range from 300 to 850; the higher the number, the better) and how many accounts you're including in the bankruptcy. . (You can order your credit score fromFair Isaac. Once you purchase it, you can simulate what will happen to it if you file bankruptcy with Fair Isaac's credit-score simulator.)

How Do I Rebuild My Credit?

After filing bankruptcy, many people are afraid to take on new credit because it was credit that got them in trouble in the first place.

But not doing so can hurt you later on, particularly if you plan to take out a car loan or mortgage. With a credit-rebuilding plan, you could see your score shoot above 600 in six months.

For example, you need to make sure all of your accounts are listed in your credit reports as charged off or included in bankruptcy. For Chapter 7, they should also show balances of zero. These accounts will remain on your reports for seven years, but you may call your creditors and ask them to stop reporting them to the bureaus. They don't have to do it, but it doesn't hurt to try. If you were able to remove even a couple of charge-off accounts from your record, it would boost your credit score.

Also, get new credit cards. Credit-card companies won't be anxious to extend you new credit once they see the bankruptcy note on your record, but you could get a secured credit card, which is basically a regular credit card backed by a security deposit you leave with the card issuer for as long as you have the account. Your credit limit will be equal to the amount of your deposit, which will be returned to you in full when you close the account or graduate to a regular, unsecured card. One thing to keep in mind is that secured credit cards usually carry an annual fee and higher interest rates.

Another credit-rebuilding strategy is "piggy-backing" on someone else's credit by asking a friend or relative to add you as an authorized user on one or more credit-card accounts. You won't be responsible for the bills, and you won't have access to the credit cards unless the original owner wants a copy to be sent to you. The primary cardholder's credit record won't be affected in any way by your bankruptcy. But you would get the benefit of their credit history right away, she says. The potential drawback is that your own credit could be damaged if your credit benefactor gets into financial trouble.

How Soon Can I Consider Larger Loans, Like a Mortgage or Car Loan?

You don't have to wait for the bankruptcy notation on your record to expire before you apply for a mortgage or car loan. These days, you can get a mortgage within a year after bankruptcy. Most mortgage lenders want to see about a year's worth of on-time payments on various accounts, which may include things like utility bills. Needless to say, you won't get the lowest rates possible. The same applies to car loans.

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