Is Chapter 13 an Option After Chapter 7? Your Options.
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Chances are you've heard of the term "bankruptcy" but may not be sure what it is. Generally, bankruptcy is a legal process by which people can get rid of some or all of their debt. It is a way for people to get a fresh start after struggling with debt for a long time.
When you file bankruptcy you are typically required to list all your debts and assets. In most cases, you will receive a bankruptcy discharge that cancels your obligation to pay all of the debts listed on your bankruptcy petition with the exception of certain types of debts that are not dischargeable. An example of nondischargeable debt includes student loans. In addition, filers cannot have priority debts like spousal support and child support discharged either.
Once you receive a discharge from the bankruptcy court you must continue to make your regular payments to any creditors that have not agreed to accept the settlement terms of the bankruptcy. If you fail to make your payments the court may order you to do so or put a lien on your property to cover the cost of your debt.
There are two main kinds of bankruptcy in the U.S. — Chapter 13 and Chapter 7.
In this article
What is Chapter 13 bankruptcy ?
A Chapter 13 bankruptcy is designed for people who are either employed or have a regular source of income. In this type of bankruptcy, a repayment plan is proposed to creditors over three to five years. The plan will usually include lower monthly payments than debtors made before filing for bankruptcy. Debtors who successfully complete the plan are discharged from their debts at the end of the repayment period. In a way, Chapter 13 is a reorganization of your finances.
The main advantage of filing a Chapter 13 petition is that it allows debtors to keep their assets while dealing with their outstanding debts. In many cases, Chapter 13 plans enable debtors to keep their homes and make regular payments to their creditors without facing the threat of foreclosure or other legal action. In addition, debtors who are behind on their mortgage payments due to job loss or other financial difficulty may be able to make their payments through the Chapter 13 plan.
However, there are also a few disadvantages to filing for Chapter 13 bankruptcy. First, Chapter 13 can take several years to complete, which may not bode well for your financial situation.
This is because the process involves many steps that must be completed before the plan can be implemented. In some cases, this process can add several months to an already lengthy process. In addition, the Chapter 13 plan will require the debtor to make regular payments to the bankruptcy trustee over the three or five years required to complete the plan. This can be a major burden for people who are already struggling to make ends meet.
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What is Chapter 7 bankruptcy?
Chapter 7 bankruptcy is also called liquidation because it is designed for people who are not employed or who have little or no income. In this type of bankruptcy, debtors' assets are liquidated and their remaining debts are discharged. Chapter 7 bankruptcy can be of great benefit to individuals who are struggling financially and drowning in debt. When you file for Chapter 7 bankruptcy, the vast majority of your debt will be discharged and you will be free to start rebuilding your finances without worrying about mounting bills and the threat of foreclosure.
The main advantage of filing for chapter 7 is that most people are able to keep their property, including their car, their home and their retirement accounts. Another benefit of a Chapter 7 bankruptcy is that the debts you owe are usually discharged within a few months of the filing date. The types of debts that are normally discharged include credit cards, personal loans, medical bills and other unsecured debts.
There are a few disadvantages too, however. The main disadvantage is that it will damage your credit score for many years after your bankruptcy is complete. This will make some creditors to refuse to do business with you as a result of your bankruptcy, making it very difficult to borrow money in the future.
Is Chapter 13 an option after Chapter 7?
Yes, but there are a few moving parts. You could file Chapter 13 bankruptcy four years after Chapter 7 if debts were discharged in the latter. If no debts were discharged, you can file for Chapter 13 before the four-year deadline. As you can tell, whether you can file for Chapter 13 after Chapter 7 is determined by whether any debts were discharged or not.
But technically, you could file for a Chapter 13 immediately after Chapter 7, but that would make it a Chapter 20 bankruptcy. This type of bankruptcy, which is an informal name, combines the benefit of Chapter 13 and Chapter 7, and might provide more debt relief than the two alone. However, the court or a trustee are likely to object to a Chapter 20 filing, and some court allow these filings to be made at all.
How often you can file for a bankruptcy is determined by the type of petition you're looking to make.
Bankruptcy type | Period |
Chapter 13 after Chapter 13 | 2 years |
Chapter 13 after Chapter 7 | 4 years |
Chapter 7 after Chapter 13 | 6 years |
Chapter 7 after Chapter 7 | 8 years |
That said, it is always best to consult with a bankruptcy attorney before making decisions about which type of bankruptcy to file.
Bankruptcy's effect on credit scores
If you are considering bankruptcy, be aware that it can significantly impact your credit score. Your credit score is a measure of your creditworthiness. A high credit score means that you are a low-risk borrower, which can make it easier to get loans and credit cards in the future. A low credit score, on the other hand, can hurt your ability to borrow money or get good rates on loans or credit cards.
The negative implications of bankruptcy extend well beyond the bankruptcy itself and include its effects on your credit score. Let's take a look at some of the ways a bankruptcy can affect your credit score and what you can do to minimize the damage.
How bankruptcy affects your credit score
When you declare bankruptcy, you can expect to see your scores drop substantially. Because bankruptcies are public records that appear on the credit bureaus' credit reporting database, you will likely be seen as a greater risk to lenders in the future. Depending on the type of bankruptcy you file, you may have to deal with negative marks on your report for up to 10 years. Negative information includes late payments, defaults, collection accounts, and judgments.
Even after your account has been paid in full after your bankruptcy is over, the fact that the account was in your name for an extended time will have a negative impact on your scores. The good news is that you can improve your credit score after bankruptcy by taking steps to improve your financial habits and paying your bills on time in the future. Your current score will be one of the factors considered by potential lenders when they decide whether to approve you for a home loan or other type of loan. So it's a good idea to start rebuilding your credit right away so that you can make a successful application for a loan in the future.
Steps to improving your score after bankruptcy
After filing for bankruptcy, you may have trouble obtaining a new loan at a favorable interest rate. While it will be impossible to erase the negative information from your credit history entirely, there are a number of steps you can take to improve your credit score over time.
- Get a secured credit card: One of the best ways to rebuild your credit is to sign up for a secured credit card. These cards require that you deposit money into an escrow account to serve as collateral for the balance on the card. You will start out with a very low credit limit, but the card issuer will gradually increase your limit over time.
- Pay bills on time: This includes your utility and phone bills, as well as your credit cards and other debts. If your payment is late or missed altogether, it could negatively affect your credit score, so it's important that you make all payments as scheduled.
- Limit your debts: Limiting the amount of debt you carry at any one time will make it easier to keep up with your payments and stay out of debt.
- Don't apply for more credit: This is self-explanatory, but if you already have a credit card, don't go shopping for another. Having more than one credit card greatly adds to your debt load, and unless you can easily afford to pay the balance in full, you should steer clear.
- Consider credit counseling: A certified credit counselor can help you with debt management, and come up with a payment plan after taking into account your monthly income. It is worth noting that these people cannot give you legal advice about Chapter 7 and Chapter 13 of U.S. bankruptcy code. That information can be obtained from a bankruptcy lawyer.
Rebuilding your credit can be a long and complicated process, but it's important to be patient and persistent if you want to get your finances back on track. If you follow these steps you should be able to reestablish a good credit rating within a few years. It might take a bit longer if your bankruptcy resulted from extended financial difficulties beyond your control. Once you demonstrate you are a responsible borrower with good credit habits, you will have an easier time qualifying for loans in the future.
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Alternatives to a bankruptcy filing
Many people consider bankruptcy as the only possible way out of debt. However, there are other options available to people who find themselves in a financial crisis. Before filing for bankruptcy, it is a good idea to explore all of your options.
- Ask for a repayment plan: Many creditors will work with you to create a payment plan to pay off your debt. It is important to communicate openly with your creditor so you understand your available options.
- Talk to a financial advisor: A financial advisor can help you develop a plan to pay off your debt and help you create financial goals for the future. A financial advisor can also help you create a budget to manage your spending and help you manage your money more effectively.
- Sell your assets: In some cases, selling your assets can be an effective way to eliminate your debt. For example, you could sell your car and cash in your savings account to pay off your debts. But you should consult with an attorney or a financial advisor to ensure your decision is in your best interests.
- Consider debt consolidation: Debt consolidation loans can be used to combine multiple debts into a single payment each month. This makes it cheaper than paying several different creditors individually because they often have a lower interest rate than personal loans or credit cards.
- Enroll in a debt relief program: Debt relief programs help you pay off debt mostly through a settlement with your lender, which means you pay less than what you owe for a clean sheet. Most debt relief programs typically take two years to complete. But if you come across one claiming to make you debt free in a few months, it's likely a scam.
The bottom line
There are two important things to keep in mind when it comes to bankruptcy: yes, it is entirely possible to file for a Chapter 13 bankruptcy case after Chapter 7 under certain circumstances, and second, if you do so, it may turn into a Chapter 20 bankruptcy filing. Each state in the U.S. has its set of exemptions regarding these filings, so you should consult a lawyer if you're unsure.
Many people who are considering filing for bankruptcy are also worried about the impact that it will have on their credit rating. Fortunately, rebuilding your credit after you have filed for bankruptcy is possible as long as you are willing to take on some responsibility and make a conscious effort to repay your existing debts on time. There are several ways to rebuild your credit after bankruptcy, including applying for a secured credit card and opening a new checking account at a bank that allows you to earn points when you pay your bill. You may also want to consider taking out a small personal loan to pay for things like utilities or rent if you can afford the monthly payments.
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Writer
Jasir Jawaid is Joy Wallet's Assistant Editor. He has more than 13 years of experience as a journalist covering Wall Street, equities, financial policy and regulation, and cryptocurrency and blockchain.
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