Chapter 7 & Chapter 13 Overview
Chapter 7 Bankruptcy
Chapter 7 bankruptcy, also known as straight bankruptcy or liquidation, is one of the simplest forms of bankruptcy. The process of filing for a Chapter 7 bankruptcy generally takes about 4-6 months to complete. Because it is a relatively simple process, the burdens on a Chapter 7 bankruptcy debtor are minimal. Other than honestly and completely providing the information requested by the filing attorney at the beginning of the process, the Chapter 7 bankruptcy debtor usually only needs to attend a single creditor meeting.
After a Chapter 7 bankruptcy petition is filed, a trustee is appointed by the court. This trustee is responsible for collecting the Chapter 7 debtor’s non-exempt property and distributing this property to the creditors to pay down as many of the debts as possible. For most people filing chapter 7, the majority of their personal property is completely exempt and the trustee has nothing to distribute to the creditors. From the perspective of a Chapter 7 bankruptcy debtor, this means that they will be able to keep most or all of their property.
At the end of a successful Chapter 7 bankruptcy, the debtor receives a ‘discharge’ of all eligible debts. Post bankruptcy, a debtor is no longer required to repay any discharged debts and the creditors that are affected cannot collect against the debtor.
The Process
The process of filing for chapter 7 bankruptcy is easy. You will need to gather as many of your financial records as you can. Of special interest to the bankruptcy attorney are records of your assets, debts and liabilities. At your free consultation we will go through these records and help you decide whether bankruptcy is right for you and if so, which form of bankruptcy is appropriate.
By law you must take part mandatory credit counseling before filing a bankruptcy petition. This can be done in person, over the phone or online and is done through a separate company. Information on this requirement is provided at the free consultation.
Bankruptcy payment plans can be arranged for your legal fees, but all bankruptcy attorneys need full payment before filing. Once the bankruptcy petition is filed, an automatic stay is put in place which requires all creditors to stop collection activities.
As mentioned above, in most cases a consumer bankruptcy does not require a hearing in front of a judge. Instead you will attend a creditors meeting in which your creditors can object to your bankruptcy. In most bankruptcy cases (especially when dealing with large loan companies) the creditors meeting will only be attended by you, your attorney and your court appointed trustee. The trustee will ask you a series of questions regarding your financial situation and the bankruptcy case. Your bankruptcy attorney will be present to help you through this quick meeting. In most Chapter 7 bankruptcies this is it.
A few months after the creditors meeting you will receive a discharge of your debts.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is a “reorganization” bankruptcy. Typically the debtor enters into a 60 month payment plan in which all or most of the debts are paid off. At the end of a successfully completed chapter 13 bankruptcy plan, the court discharges (i.e. wipes out) the remaining unpaid debts. (Note, there are some non-dischargeable debts that bankruptcy cannot wipe out- if you have one of these debts, the bankruptcy attorney will discuss the issue with you prior to filing).
We typically advise clients to file a Chapter 13 bankruptcy in three situations:
- Where the debtor does not meat the “means test” for a Chapter 7 bankruptcy because the debtor’s regular family income is too high. In this case, the Chapter 13 payment plan is a second best option that allows you to make one reasonable payment a month to all creditors through the bankruptcy trustee’s office. If this payment plan does not pay off all the debt within five years, then the remaining debt is wiped out. If your income later goes down, the plan can be modified to lower payments, or even converted to a Chapter 7 which ends the payment plan early.
- Where the debtor wants to keep property that cannot be exempted under a Chapter 7 bankruptcy. In a Chapter 7 bankruptcy, the bankruptcy trustee can sell any of the debtor’s property that is not covered by a statutory exemption. If you have more property than exemptions but want to keep your property, the Chapter 13 bankruptcy can often solve this problem.
- Where the debtor is trying to keep a house threatened with foreclosure. We typically see this situation where the debtor has arrearages due on their home mortgage due to a temporary loss of income that has been resolved. Although they can afford to continue paying the mortgage, they cannot afford to pay the back due amount at the same time. In this case, the Chapter 13 bankruptcy plan allows you to pay back the arrearages through the plan while remaining current on your mortgage outside of the plan. This would not be an option in a Chapter 7 bankruptcy as the bank would still be allowed to foreclose on the property.
You can qualify for chapter 13 bankruptcy if your unsecured debts are less than $300,000 and your secured debts are less than $900,000. If your unsecured/secured debts are greater than these sums, a similar Chapter 11 bankruptcy plan can be filed. If this situation applies to you, please contact Avatar Legal, PC for more details on the Chapter 11 bankruptcy plan.
