Many
people have very little understanding of bankruptcies. Below I am attempting to give a cursory
overview of the main types of bankruptcy.
It is not an exhaustive attempt to cover their differences.
For most individuals, there are basically only two bankruptcy
options: Chapter 7 and Chapter 13. Individuals can also file for Chapter 11 or
Chapter 12, but they are designed for businesses and farmers or fisherman
respectively.
Chapter
7
A Chapter 7 bankruptcy is a liquidation proceeding where debtors
can seek a discharge of most types of debts in exchange for assets they own
that are not protected by state or federal law.
Many debtors do not have any such unprotected assets, and therefore do
not need to surrender any assets to obtain their discharge.
Assets
Assets can include more than just a debtor’s obvious tangible
assets such as a car or a house. Assets
can include a debtor’s right to sue someone or a right to an inheritance. It also includes any debts owed to a debtor
by anyone including family members.
Another thing that can be viewed as an asset is anything you
have paid to creditors to the detriment of other creditors. The most common is payments made to friends
or family members on debts.
Timeline
Every bankruptcy must begin by filing the Voluntary Petition,
Schedules, and other documents with the Bankruptcy Court.
In a Chapter 7, like in a Chapter 13, the debtor will be
required to appear at a meeting of creditors about 30 days after the filing of
the case. If there are not objections to
the debtor’s discharge, then the discharge will be issued about 60 days after
the conclusion of the meeting of creditors.
If there are assets to administer, the case will not close until both
the discharge is entered and the assets are fully administered.
Limitations
Not everyone can file a Chapter 7 bankruptcy. Income can be an issue. If a debtor makes too much money and their
debt is primarily consumer in nature, then they will not be eligible for a
Chapter 7 bankruptcy. They will likely
be forced into a Chapter 13.
Benefits
The biggest reason to file a Chapter 7 bankruptcy is its speed
and efficiency. A debtor is often done
with their case in as little as 5 months.
The debtor is no longer under court supervision after closing, so they
can continue to live their life normally and begin repairing their credit. The debtor often pays less overall in legal
fees and repayment to creditors in a Chapter 7.
Chapter
13
A Chapter 13 bankruptcy is a reorganization proceeding where
debtors propose a plan to repay creditors based on several requirements set out
by the Bankruptcy Code. Upon successful
completion of a court approved plan, debtors will receive a discharge of most
types of debts left unpaid at the end of the plan.
Assets
Like in a Chapter 7, what assets the debtor has is central to
their case. Unlike a Chapter 7, in a
Chapter 13 proceeding, a debtor is not required to liquidate any assets. Instead, a debtor must repay creditors such
that unsecured creditors will receive at least as much as they would have in a
Chapter 7. Many debtors will file a
Chapter 13 because they want to avoid liquidation of a treasured asset.
Plan
The plan proposed by the debtor must be approved by the
court. The gatekeeper of an approved
plan is often the Trustee assigned to supervise the case by the United States
Trustee. To obtain this approval the
debtor must satisfy the requirements of 11 U.S.C. §1325. Below are some of the important plan
requirements. This is not an exhaustive list.
-
The debtor must repay any arrears on secured loans
they wish to retain.
-
The debtor must pay all priority debts in full.
-
The debtor must pay all disposable income into the
plan.
-
Unsecured creditors must not be treated worse than
they would be in a Chapter 7.
Timeline
Debtors begin their Chapter 13 bankruptcy by filing the
Voluntary Petition, Schedules, a proposed Chapter 13 Plan and other documents
with the Bankruptcy Court.
Like in a Chapter 7, a debtor must attend a meeting of creditors
roughly 30 days after filing their case.
After the meeting of creditors, the next hearing is the Confirmation
Hearing for the proposed plan. After
successfully obtaining court approval of the plan, the debtor will simply
follow the terms of the plan for the length of time dictated by the plan. Plans are usually 3 to 5 years depending on
the debtor’s income.
After successfully completing the plan, the debtor will receive
their discharge of most of their remaining debts that were not
Limitations
In a Chapter 13, a debtor must have sufficient regular income to
fund a plan. So, it is opposite of
Chapter 7 where too much income can bar a filer.
There are also limitations on how much debt a party can have
when seeking a discharge in Chapter 13.
As of this writing, if a debtor has more than $394,725 in unsecured debt
or $1,184,200 in secured debt, they do not qualify for a Chapter 13
bankruptcy. If a debtor does not qualify
for this reason, they may qualify for a Chapter 7 or Chapter 11 depending on
their circumstances.
Benefits
The main benefits for a Chapter 13 over a Chapter 7 is the
flexibility it gives the debtor. It
allows a debtor to keep a home that has arrears on its mortgage, homeowner’s
association dues, or taxes. It allows a
debtor to reduce the debt and interest on certain vehicle loans. It allows a debtor to reduce interest on
credit card payments.
Conclusion
Chapter 7 and Chapter 13 are very different vehicles for the
same goal: debt relief. Anyone who is interested in learning how
these can be used for their benefit should consult with a qualified attorney.
