Chapter 7 Bankruptcy

Chapter 7 Bankruptcy vs. Chapter 13 Bankruptcy

The two types of bankruptcy most commonly filed by consumer debtors are called “Chapter 7” Bankruptcy and “Chapter 13” Bankruptcy, after the Bankruptcy Code sections where the applicable law is found.  Whether to file under one Chapter or the other depends upon several factors, including your current income, the value of your assets, and your goals in filing a bankruptcy petition.

If you file your petition under Chapter 7, you have passed the “means test” (an evaluation of your debt and your income and family size in relation to the median income for your state).  You can expect to receive a “discharge” of unsecured debt within four to six months from filing, barring complications, and then your case will close, giving you your fresh start.  Be aware that, to the extent your “estate” (your assets and possessions) exceeds your allowable “exemptions” (statutory means of exempting assets/possessions from the estate), the Chapter 7 trustee may liquidate (sell) and distribute that portion of your estate to your creditors.  This can be problematic if, for example, you have equity in your home or car; in other words, if your home or car are worth more than you owe on them.  One of the purposes of your consultation is to determine whether this is the case, and if so, and you want to retain possessions that are non-exempt and/or in which you have equity, Chapter 7 may not be right for you.

Soon after filing your Chapter 7 petition you will file a “statement of intention” with regard to the treatment of your secured creditors.  The statement of intention serves to notify these creditors of whether you intend to retain the collateral securing their claims, or whether you intend to surrender that collateral.  For example, if you own a car but are still making payments on the loan, you may wish to retain your car, even though you could surrender it and have the remaining loan balance discharged.   If you can afford to do so and the creditor agrees, you can enter into a “reaffirmation agreement” and “reaffirm” that car loan, and keep the car.  In the alternative, you may be able to “redeem” that car.  Please see the article, Keep your car – redemption in a Chapter 7 bankruptcy filing for more information.

If instead of filing a Chapter 7 petition you have filed your petition under Chapter 13, you will have experienced much the same procedure as if you had filed under Chapter 7, and also you will have filed a proposed repayment “plan” lasting three or five years.  You will commence making monthly plan payments to the trustee, who will in turn make distributions to your creditors in order of priority as set forth in that plan.  When all plan payments have been made, your Chapter 13 plan is completed and you will receive a discharge as to that portion of unsecured debt which was not be paid through your plan.

As you might imagine, there is much to consider in determining whether Chapter 7 or Chapter 13 filing is appropriate for you.  For example, we mentioned before that a Chapter 7 debtor must pass the “means test.”  This test is designed to ensure that there is no abuse of the bankruptcy process by determining whether an individual contemplating filing a Chapter 7 petition has enough income to fund a feasible Chapter 13 plan and repay some of his unsecured creditors.  So, your income may determine whether Chapter 7 or Chapter 13 is appropriate, but consider also that filing under Chapter 13 has some advantages depending upon your individual situation.  For example, if you are behind on your loan or lease or mortgage payments, the “curing” of those arrears can take place over time through your Chapter 13 plan.  If your property is subject to foreclosure, bankruptcy can give you options to cure the mortgage arrears over time or surrender the property and be discharged of any account deficiency – please see the article Foreclosure and Bankruptcy for more information. Also, some secured creditors are subject to “cram down” whereby you can pay market value of the collateral, rather than what you owe on the loan secured by that collateral – see the article Keep your car and lower your payment with Chapter 13 “cram down” for more information.  And, if you own your home but are “under water,” meaning that what you owe on your home exceeds the current market value of the home, then under certain circumstances you may be able to “strip off” a second mortgage and that debt will be discharged as unsecured.   These options will be discussed at your consultation.

Please take note of this important caveat:  the information on this page is not legal advice, nor is it intended to be legal advice.  The purpose of this page is merely to introduce you to some basic bankruptcy concepts so that you can have an informed discussion about your options when you attend your bankruptcy consultation.    We look forward to meeting with you and to helping you to achieve your “fresh start.”

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