[MUSIC] Hi there, Michael Bovee with
Consumer Recovery Network. Thanks for tuning into
DebtBytes, our YouTube channel. Today I want to talk about the
differences between, chapter 7 and chapter 13, for the typical
consumer, looking at the kind of debt relief that they need when
it comes to unsecured debts. And if you have
some secured debts, we’ll talk about how
that’s impacted, okay? So first and foremost,
chapter 7 is a discharge of your obligations, your
unsecured debt. You can reconfirm certain
debts in a chapter 7, like your mortgage, right? So if your equity in
your house is exempt and there’s no issues with your home
and you want to continue to live there, you can continue
to pay your mortgage. You can reconfirm that
secured loan, right? Same thing with a car, actually. Secured debts, in general,
there’s a method for you to reconfirm the two most
common types, which are where you’re living, and how you’re
getting to and from work. When you go through a chapter 7
and it impacts your unsecured debts, let’s say, for the most
of us, it’s gonna be credit card debt or medical bills,
that forces into a chapter 7. That debt is typically
discharged, and creditors receive nothing. There are instances where
they do get something, okay, like say, 10% of what
they’re owed or less, right? So, how do they get that money, is usually because you have some
things that are not exempt. In other words,
every state has a set of exemptions that apply
in their jurisdiction. Even though bankruptcy is
a federal court process, it’s applied differently depending
on the state you live in. If, for example, you live
in Florida, and you have a $5 million home and you own
it outright, free and clear. Nobody can take that from you. Not a penny of that value
can they take from you, if you file chapter 7. You can shed 100 grand
worth of credit card debt in that chapter 7, and not lose
a penny of the equity in your home because that’s
the way Florida is set up. It is for a home,
a personal residence, and it can’t be of a certain
acreage, size, okay. So, same thing for Texas,
as an example, right? So, and then you can live in
states where if you have more than $30,000 of equity in your
home, it’s not protected. And now the trustee
is gonna look at it, well how much more than 30,000? What’s the cost gonna be to
market that home and sell it? Okay, so
there’s quite a bit there. And we’re gonna go ahead and
force you out of your home. You cannot keep it, you
couldn’t reconfirm it, right? Those are some of
the reasons why, and cars can be treated
the same way. These are some of the reasons
why somebody might avoid trying to file a chapter 7,
is where they live. You also have to qualify for
a chapter 7. Ever since the BAPCPA law
changes back in 2005, it created a means test. What that is, and
it’s state specific as well, they take your household size,
right? You have children whatever, how
many people living, and all of the income that contributes
to that household, right. So a spouse could file
separately of the other, but each of their income is going
to impact the calculation for the individual filing and
filing jointly, right? So again, household income. If it’s over a certain
amount for your state, then you’re gonna not qualify. If you’re over by say 1000,
2000 or something like that, talk with an attorney and
see if they have some allowable exemptions that might
apply to you and you’ll still be able
to qualify for the 7. But if you’re much
over that median cap, then you’re forced into
a chapter 13 if you need the court’s
protection from creditors. So chapter 7, gives you
an opportunity to start over. And go into the next stage
of your financial life, without all of
the unsecured debt. And you can even shed
some of the secured debt, if you don’t want it anymore. Like, let’s say you’re
underwater on a car loan. Turn it back into them and
you won’t have any deficiency balance from them auctioning it
off and there being a difference between what you still owed on
it and what they got at auction. And let’s say it was $2000,
that’s a deficiency balance, and that’s discharged
in the bankruptcy, so there’s reasons to do that. When you get that fresh start, it is typically on average
gonna take just a few months. And the national average cost
of bankruptcy is about $1800 and that’s start to finish, right? And that’s all the attorney’s
fees, the filing fees, the counseling fees, all of
the things that go into it. These are mandatory costs,
right? So and sometimes even less,
right? So as you get inland,
the coastal cities, some busy places,
lots of people. Maybe those attorneys are gonna
charge a little bit more, whereas you get inland like I
am, you’ll find attorneys that can do it for
$1,500 even less, right. I’ve even heard of $1,200. So the cost is
pretty affordable. A lot of folks even wait
until their tax refund and that’s when they can
file bankruptcy. That’s why we see a peak in
bankruptcies around this time of year actually. So when you do the chapter 7,
and you get the fresh start, and your life becomes
more affordable and you’ve shed all that bad debt,
your credit is impacted. It stays on your credit report
for ten years, a chapter 7 does. Chapter 13, only seven years. In that ten years,
you are not in credit purgatory. You’re actually able to go and
finance a mortgage. FHA, underwriting standards, you
can’t qualify for a mortgage for two years after your chapter 7. That’s not that long. You are gonna have pre-approved
credit card offers in the mail after your filing, directly after your discharge,
within weeks. And you could probably
walk onto a car lot and get a decent interest
rate in that first year. By decent, I mean under 10%. If you want to get really great
rates though on credit cards, car loans, the FHA is already
a great rate on a mortgage, but some of your other credit
opportunities, they’re just not gonna be great rates, but
really only for a few years. So not that full ten years. And then student loans,
government backs student loans, underwriting standards for those
are gonna prevent you from being able to get new student loans
for yourself, or co-sign for Plus loans type of thing for
your children for a few years, but still not the ten. So it’s a fresh start, but
not necessarily credit-wise, there’s a little hold back for
how soon you can get on with your life with
other financing options. Now, the legal protection that
you’re afforded through chapter 7 is, and or
any bankruptcy is, undisputed. So one of the reasons that
somebody might jump into filing a bankruptcy and maybe
even not have an intention to go through with it, is to say,
they wanna stop a foreclosure. Or they wanna stop
a lawsuit in its tracks. What I’m saying here is
that you’re afforded legal protection
from all creditors. So your ability to stop
that lawsuit in its tracks, or if they’re already
garnishing from you, or they’ve reached into
your bank account and levied that, sometimes you
can even claw back money that a collector has taken from
you by filing a chapter 7. Chapter 13 is a totally
different monster. Most people, the vast majority
of people that file a chapter 7, get through it, complete it,
it’s over, they move on. It’s the opposite
with a chapter 13. Well over half, almost
two-thirds of people that file chapter 13 historically
since we’ve had that option, do not complete
their chapter 13s. There’s a reason for that, it’s inflexible,
that is the number one reason. So let me give you some of the
examples of some of the benefits and the drawbacks. So when you file a chapter 13,
it’s a reorganization. In essence, it’s a forced
repayment plan, right. So you can just go ahead and
pay your mortgage like normal, go on with your house. You can pay your
car like normal, go on with that car loan and
that relationship. You can not go on with
credit cards and or other unsecured type of debts. What happens is that, you can
cram down a second mortgage which is awesome if you’re
underwater on a second. We just came through a spat of
the recession where a lot of folks were underwater,
almost over night, on their home’s value. And they had a large second,
let’s say $200,000 first, and $100,000 second,
you can cram down that first, to the value of the home,
even if it was down to $0. Really cool, you just had to go
through five years of paying in the chapter 13 to do it. Let me be more descriptive. So let’s say you have $60,000
worth of credit card debt, mortgage, and a car payment. And you enroll in a chapter
13 reorganization plan. And the trustee comes up with
the repayment structure and it says that, okay, you’re
going to pay this much around, take these unsecured creditors
for your credit card debts. And so we’re gonna have you pay
$1000 a month for 60 months. Well, guess what? That’s $60,000. You’re paying back your credit
card banks at zero interest for the lifetime of the plan. And if that’s how it
ends up looking like, that distribution for the
trustee out to the creditors. But let’s say you’re only
able to pay $500 a month to a trustee, and that at least would go towards
those unsecured creditors. And now,
they’re all getting half, right? So, over that 5 years, 60 month
plan, they’re all gonna get half of what they’re
owed at no interest. And I should be clear here,
chapter 13 allows for a three year repayment or
a five year repayment. And five years is by far and
away the most common. So if you can afford
only to pay back those unsecured creditors
in your chapter 13, say 10% of what they’re owed,
that’s what they get. So imagine this. You are being sued by
a credit card bank, let’s say American Express,
they sue a lot. It’s a $20,000 balance, right? It’s huge. You can’t afford it, you stopped paying it
because you can’t afford it, and the situation that
caused that hasn’t relented, maybe it’s even getting worse. But you’re sued and now you gotta take
things real seriously. But in your state, you either
make too much money to qualify for a chapter 7, your
household income is too high, or you have 60,000 in equity
that’s not protected, which is far more than
what you owe Amex, so it doesn’t make sense to try and
do that. What you could look at is
a situation where you file and in the chapter 13,
Amex doesn’t get but 10%. Even though you’re
over the median income, you can’t do a chapter 7, even
though you’re over in equity. You file the chapter 13 and
those things don’t matter. They don’t apply. And American Express is going to
get whatever they’re limited to, or whatever the trustee suggests
that they’re gonna get. Compare that to what you might
be able to do if you were to negotiate a settlement
with American Express or the attorneys for Amex, in that often times you can settle at
50% if you can show a hardship. If you’re in that position
you’re likely able to, and or a little higher,
not much more. But you have to
pay it real quick. So sometimes it’s worth
it to try and struggle to come up with a scenario
where you can avoid chapter 13. The reason you might want to
do that is the following. Okay, so there’s legal
protections, right? Nobody can garnish you, nobody can reach into your
bank accounts and levy or anything if they have
a judgement against you. Everybody needs to sit down,
shut up, Amex come into the court
that just sued you. The trustee says, imagine this
even though it’s not like this, the judge says, okay, all of you
guys go over there in the corner and sit down and shut up. All you banks, all you people
that Michael owes money to. And then I’m gonna have a nice
adult conversation over here and I’ll get to you in a second. And that’s what happens. All the creditors in this
scenario are going over there, they’re gonna be quiet. And then the judges, the trustee
really, is looking at the plan. And the trustee approves it,
then calls Amex and all of your other unsecured
creditors back over and says, this is what you’re gonna get. Okay, see you, bye, right? And everybody leaves. That’s kind of an outline of
what’s typically gonna happen, but that’s just
the beginning for you. When you’re forced to come up
with a certain amount of money every month and
get that to the trustee, you have to do that in order to
keep the court’s protection from these creditors that
are barking mad and want their money and
trying to sue you. So if you do not come
up with the money, say, life happens, of course, right. So life happens for you to be watching this
video in the first place. So, how’s that gonna stop? It’s not.
Life’s still gonna happen, and if a financial setback occurs
to where you’re unable to pay the trustee that month,
you lose the benefit of being in a chapter 13,
the court’s protection. And you wasted some money that
you now still owe everyone back to the balance that you
originally enrolled in the chapter 13 with, and perhaps
even with an inflated amount. And you’re stuck,
you don’t have an answer. You still can’t qualify for chapter 7 in this analogy
that I’m providing. And or you’re in a spot, probably where you’re not able
to raise the money to a lump sum to settle with some of these
creditors that are barking mad. So, you’re stuck. And the problem is is that,
what I mentioned, that’s the inflexibility
of chapter 13. Trustees aren’t very forgiving. You absolutely have
to get approval from the trustee to live
your financial life, while you’re involved
in a repayment plan. What I mean is that you can’t
go out and take on typically new financial obligations or loan
contracts, and things like that. You have to get them
approved first. And they’re not known to
be all that forgiving and in an approving mood for you
when you’re not paying all your debts back and
you need their protection. So chapter 13, not a great
option for most people, but it’s a palatable one I suppose. If you’re in the right set of
circumstances where you can’t do the 7, you can’t come up with
the money to settle, and you need creditor protection, or you need to cram down
a second like I said, so that’s a really feature, but
it’s about one of the only ones. If at some point you want
to talk to somebody about, you can’t qualify for the 7,
what can you do to try and navigate your debts while
avoiding chapter 13? I talk to people about
it everyday, have for a couple of decades. Thousands and thousands of
people I’ve helped come to terms with the fact that they
need to file a chapter 7, how they can make some
changes and qualify for a 7. How to avoid 13 or how to come
to grip with the fact that sorry, given your goals and your
situation, that’s what you need. You’re more than welcome to
post in the comments below and let’s talk about that. Chapter 7 is real
straightforward, what you really need is
to talk to an attorney. You can call the hotline and
press option three and that will get you in touch with
some bankruptcy professionals, and start talking about that. That’s a free consult. I’m at option two, so if you’re
thinking gosh, okay, fine, I did the bankruptcy consult. I can’t do the 7, which I’d
prefer you do, usually. I need some strategies
to avoid a 13. Put them in the comments,
I can correspond with you there. Call me on the phone,
I can talk with you there. Thanks for tuning in. I’ll see you on the next video. [MUSIC]