Which type of Bankrutpcy is Right for me?
If you are an individual considering filing for bankruptcy protection, you are probably wondering whether one of the two most common bankruptcy filings for individuals, a Chapter 7 or a Chapter 13, is best for you. Or maybe you never knew there were bankruptcy options. This article is intended to give you some basic information to aid you in making your decision or framing questions for your bankruptcy attorney. This article is not, and should be interpreted as, legal advice directed at any particular reader.
Personal Bankruptcy Under Chapter 7
A Chapter 7 bankruptcy is one in which the debtor seeks a complete discharge of most of his unsecured debts. Debts that are included are things like medical bills, credit card bills, personal loans and the like. A Chapter 7 bankruptcy will not result in the discharge of any federal or private student loans or outstanding tax obligations. A debtor who obtains a discharge in bankruptcy under Chapter 7 will see that discharge reflected on his credit report for 10 years.
In a Chapter 7 bankruptcy, a bankruptcy trustee is appointed, and that trustee is responsible for marshalling the debtor’s assets for the benefit of his creditors. What that means is that if the debtor has a second home, a boat, or other assets in excess of the allowable exemptions in his particular jurisdiction, the trustee can seize and liquidate those assets in order to distribute the proceeds to the debtor’s creditors. In many states, a debtor’s homestead property may not be completely protected, and this should be something every debtor discusses with his bankruptcy attorney.
In 2005, Congress enacted legislation intended to force a larger number of bankruptcy debtors to enter into Chapter 13 repayment plans. One way this was done was to adopt income limits for people seeking Chapter 7 bankruptcy relief. The limit applicable to you will depend on where you live and how many people are in your family. If your earnings exceed the limit in your jurisdiction, you will almost never be eligible for a Chapter 7 bankruptcy filing.
Personal Bankruptcy Under Chapter 13
A Chapter 13 bankruptcy is much different from a Chapter 7. In a Chapter 13 bankruptcy, the debtor enters into a plan to partially or fully repay his outstanding debts. The Chapter 13 repayment plan will last 3-5 years, and when the debtor has successfully completed the plan, any remaining unsecured debts will be discharged (with the same exceptions as are noted above).
In a Chapter 13 plan, the trustee accepts monthly payments from the debtor and distributes those, as appropriate, to the bankruptcy creditors. However, a key difference in a Chapter 13 bankruptcy is that the debtor is permitted to keep any property he chooses. If the debtor has a vacation home, or a valuable coin collection, he can not be forced to liquidate these to satifsy his creditors. What will happen, however, is that the value of those assets will be taken into consideration in setting the plan payment. For example, if a debtor has $40,000 in assets he would like to keep, and his Chapter 13 repayment plan is a five year plan, he will be required to make a minimum monthly payment of $667, assuming the debtor has at least $40,000 in unsecured debt. The payment reflects the fact that the debtor will be expected to repay a minimum of $40,000 in debt since that is the value of the assets he is choosing to retain and that otherwise would have been liquidated and distributed immediately to his creditors. Of course, if the same debtor only owed his creditors $20,000 in unsecured debt, his Chapter 13 plan payment would be $333 per month since that payment would result in a 100% payback of the creditors’ claims.
During the pendency of a Chapter 13 plan, creditors can not charge interest, late fees or any other fees on the debt they hold. They also can not seek to collect the debt. This is true as long as the debtor pays as agreed in the Chapter 13 plan. The Chapter 13 plan payment may be adjusted from year to year to reflect increases in the debtor’s income, and the trustee may also recover tax refunds for distribution to the creditors. Different trustees have different requirements, so it is difficult to generalize as to what information and documents will be required from a debtor annually. At the very least, most trustees will require the debtor to provide a copy of his annual income tax return to verify income during each year of the Chapter 13 plan. A Chapter 13 bankruptcy will stay on the debtor’s credit report for 7 years.
Five Signs that You Are Ready for Bankruptcy
