Q: When I filed for bankruptcy, I was told by my attorney that Chapter 7 meant you don't have to pay anything on your old debts and it takes 10 years to get credit again. He said Chapter 13 meant a plan through which you pay a trustee, who pays your creditors, and after three years your credit would be re-established. Is this true?
A: Basically, yes. Under Chapter 7, all but a few of your assets are sold and the proceeds used to pay your creditors. A Chapter 13 bankruptcy would allow you to keep assets, but you'd have to repay at least a portion of your debts.You qualify for Chapter 13 if you have regular income and not more than $350,000 of secured debt and $100,000 of unsecured debt, says Alan Nisselson, a lawyer with Brauner, Baron in New York.
Chapter 13 calls for repayment of some or all of your debt over three to five years. Typically, your creditors must settle for less than 100 cents on the dollar, but they can expect at least as much from a Chapter 13 plan as they'd get if your assets were liquidated under Chapter 7, says Michael Brofman, a lawyer at Certilman, Balin, Adler & Hyman in East Meadow.
What you'll pay them is decided by the court, based on how much you earn, what you need for living expenses, and what's left over. One issue currently in dispute is how the mortgage on a first home should be treated under a Chapter 13 filing, Brofman says. "Bankruptcy law says that the debtor must pay the mortgage on a first home in full. But some judges have ruled that's not the case when the value of the property is less than the lien on it."
Chapter 13 is more generous in discharging you of obligations. "If you committed fraud to obtain a loan, under Chapter 7, that loan will not be discharged," Nisselson says, but under 13 it's treated like all others and partially forgiven.
Chapter 13 makes sense for people who are employed and chiefly in need of more time to pay off their debts. "Too many people try to use it who shouldn't," Brofman says. "They see ads that say, `Stop foreclosure, save your property by filing Chapter 13.' But they still can't afford the payments on their debts, so after paying someone to file Chapter 13, they wind up with a foreclosure anyway."
If you don't earn enough to make Chapter 13 a viable alternative, or don't own any assets, you're better off filing under Chapter 7. That allows you to keep an interest in your pension plan, and your car - if you maintain current payments on it and make up any delinquency within a reasonable time. You forfeit your individual retirement account, Nis-selson says.
Everything else you own is sold to pay off your debts, which are forgiven, with a few important exceptions. These include child support, alimony and any judgments against you for drunken driving.
Under federal law, a Chapter 7 bankruptcy filing stays on your rec-ord for seven years. But it doesn't always take that long to regain credit. Occasionally, in fact, people have received new credit card applications within months of filing.