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A new study published by the Federal Reserve Bank of Philadelphia compares Chapter 7 and Chapter 13 in terms of post-filing access to credit. I found this study particularly interesting because the results seem counter-intuitive in some respects. If you have too much debt to deal with, you may be considering filing bankruptcy but aren't sure which chapter is best for your situation. An experienced North Carolina bankruptcy attorney can advise you on which is preferable, assuming you qualify for either based on your means test. But in the meantime, here are the highlights from the recent Federal Reserve study that I found fascinating:
It seems like if you're trying to repay as many of your debts as possible rather than just having them written off entirely (at least for unsecured debts) that creditors would view that more favorably. But in fact, it's just the opposite. The study authors say this trend has only come into play since the 2005 Bankruptcy Reform where more people have been forced to take Chapter 13s since the new laws have blocked more people from Chapter 7.
Insight: If you’re thinking your creditors will appreciate you more if you try to pay them on a payment plan rather than unloading your debts and getting a financial fresh start, think again.
#2 Chapter 7 filers pay their debts better after a bankruptcy than Chapter 13
According to the study, when comparing Chapter 7 and Chapter 13, those who file Chapter 7 are better payers on existing debt such as mortgages and auto loans that survive the bankruptcy filing than Chapter 13 debtors. And for new lines of credit such as credit cards, Chapter 7 filers are the better payers. Credit granting financial institutions are very savvy about running algorithms and analysis and probably have realized this which explains #1 above!
Insight: The complete financial fresh start a Chapter 7 offers may give you a better shot at maintaining financial stability, keep your home out of foreclosure and hang on to your much-needed vehicle!
#3 Chapter 13 filers are less likely to receive new credit offers after bankruptcy than Chapter 7
The Federal Reserve research shows that new credit offers (although with lower credit limits) are more commonly offered to Chapter 7 filers than 13. This is logical since after Chapter 13, filers have several years of plan payments to make and creditors assume that your disposable income is dedicated to your existing debt and you don’t have spare cash for new debts. Whereas Chapter 7 filers likely have more disposable income since their debt load was significantly decreased with the filing.
Insight: If you’re eager to rebuild your credit, Chapter 7 may be a better option to clear out the old and pave the way for rebooting your credit with new lines of credit managed responsibly.
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If you’d like to read the whole Federal Reserve paper and check out the research for yourself, click here to download it for free. But if you prefer to skip the academic reading and get advice straight from the horse’s mouth, contact the law offices of John T Orcutt for expert advice on filing bankruptcy in North Carolina. Our experienced attorneys will review your financial circumstances, advise you on whether you qualify for a Chapter 7 bankruptcy and which chapter is preferable for your situation. Call now or click here to schedule a free consultation.