Every day, people just like you decide to file for bankruptcy.With this bad economy, bankruptcy just doesn’t hold that old stigma it may have had a decade ago. Most of us are struggling with debt–and many of us have lost income thanks to the economy. Bankruptcy laws have helped millions of Americans get out of debt. They’ve also helped people stop creditor harassment through the bankruptcy automatic stay.
If you’re tired of creditors calling at all hours and you’re looking for relief, filing bankruptcy could help you. But you must first understand the different types of bankruptcy law and which is the right one for your financial situation.
There are five types of bankruptcy set out in the federal law governing bankruptcy:
Chapter 7 – Straight or liquidation bankruptcy, available to individuals and businesses.
Chapter 9 – Bankruptcy for municipalities only.
Chapter 11 – Reorganization bankruptcy for businesses and certain individuals with very large debts.
Chapter 12 – Bankruptcy specifically for family farmers and fishermen.
Chapter 13 – Reorganization for individuals.
As you can see, Chapters 7 and 13 are the two types of bankruptcy most likely relevant for individuals who have lost their jobs in the economic downturn. Each is discussed briefly below.
Chapter 7 Bankruptcy:
In a Chapter 7 bankruptcy, the debtor gives up all of his non-exempt property. The bankruptcy court trustee (a lawyer or accountant who is employed by the Department of Justice and who handles administrative aspects of the bankruptcy) will supervise the sale of the property and he will give the money from the sale to the creditors. If property is non-exempt but still of limited value considering the costs of holding the sale, the trustee may decide not to take the property, but that will be a decision of the trustee, and not of the debtor. Once the sale is complete, the court enters an order discharging all of the debtor’s dischargeable debts that are not covered by the money from the sale of assets. Many Chapter 7 cases are “no asset” cases in which the debtor has no non-exempt assets and the debts are discharged without partial payment.
A Chapter 7 bankruptcy moves very quickly. The first meeting of creditors, a step in every Chapter 7 bankruptcy, often takes place 5 or 6 weeks after filing. The court’s order discharging the debts is entered about 60 days after the meeting of creditors.
Chapter 13 Bankruptcy:
Chapter 13 is called reorganization because it allows the debtor a chance to get organized – to pay off certain debts over time. In turn, this allows the debtor to keep valuable property, like a house or car. When the debtor files for Chapter 13 bankruptcy, he makes a bankruptcy plan for how he will pay his debts. Generally the plan will call for a payment to the trustee each month; in turn the trustee will use these payments to pay the creditors, the debtor’s attorney and the trustee’s fee. This plan usually lasts from 3 to 5 years. The plan must be approved by the court. A creditor has the right to challenge the plan for a variety of reasons. Here are some very important things to understand about the Chapter 13 plan:
1. There are certain debts which must be caught up over the life of the plan. These include a car loan, if the debtor wants to keep the car; a mortgage loan, if the debtor wants to keep the home; child support and maintenance (alimony); and certain other non-dischargeable debts. If the debtor is behind on those payments when he files bankruptcy, the plan is going to require that he make current payments every month and additional payments towards catching up on the back amount owed. The back payments will be part of the monthly payment to the trustee. At the end of the plan, the debtor must be current on child support, and – assuming he wants to keep the house or car – current on those loans.
2. A Chapter 13 plan also will include paying something towards dischargeable, unsecured debts like credit card or medical debts. How much is paid towards those debts depends on the debtor’s income. In some cases, the debtor will pay very little towards those dischargeable debts and in other cases, the debtor will pay most of those debts. If the plan requires only partial payment of the dischargeable, unsecured debts, the remainder will be discharged if the plan is completed successfully. If the debtor has valuable property which is not exempt, he will need to use that property or its equivalent in value to pay creditors in order to receive a discharge.
3. Because a Chapter 13 plan requires the debtor to catch up on certain debts over the life of the plan, to succeed in a Chapter 13 a debtor usually needs either to have more income than when he fell behind on his debts or to live on a very tight budget over the life of the plan – or both.
4. Many Chapter 13 plans fail. If the debtor misses payments under the plan, the bankruptcy trustee will ask the court to end the plan. When this happens, the debtor also loses the protection of the bankruptcy and all original debts are reinstated.
What Bankruptcy Can and Cannot Do
What a Chapter 7 Bankruptcy Can Do:
Release the debtor from personal liability for dischargeable debts, including medical debt and most credit card debt.
Stop creditors and collection agencies from calling.
Stop a wage garnishment.
Stop court actions to collect debts, for example suits by credit card companies.
Stop a utility shut-off or help get utilities back on.
Temporarily stop court actions to recover property, such as evictions or foreclosures.
What a Chapter 7 Bankruptcy Cannot Do:
Release the debtor from non-dischargeable debts.
Eliminate a security interest, such as a mortgage or security in a car.
Stop an eviction if the eviction court had already entered a judgment of possession before the bankruptcy was filed.
Protect co-signers, unless they also file bankruptcy.
Release the debtor from credit card debts incurred close in time before the bankruptcy is filed.
Discharge debts that are incurred after the bankruptcy is filed.
Allow the debtor to discharge debts the court decides he can afford to pay (if the debtor has significant income).
Allow the debtor to keep valuable property, such as a vacation home, an RV or expensive jewelry.
What a Chapter 13 Bankruptcy Can Do:
Stop creditors and collection agencies from calling.
Stop a wage garnishment.
Stop a utility shut-off or help get utilities back on.
Release the debtor from dischargeable debts which the plan does not require him to pay.
Stop court actions such as foreclosures and allow the debtor the chance to catch up on missed payments in order to save the home.
Stop other court actions, such as collection suits by creditors and collection agencies.
Allow the debtor to keep valuable property such as a home or car, as long as payments are made.
Allow the debtor, in certain circumstances, to keep other valuable property which might have to be sold as part of a Chapter 7 bankruptcy.
Eliminate the security interest in a second mortgage, if the second mortgage is wholly unsecured, because the value of the house is not enough to pay the first mortgage, or is just enough to do so.
Revise a car loan so that the principal reflects the current value of the car, in situations in which the loan is at least 910 days old; in some instances, reduce the interest rate on a car loan.
What a Chapter 13 Bankruptcy Cannot Do:
Release the debtor from non-dischargeable debts.
Eliminate a security interest, such as a mortgage.
Discharge debts that are incurred after the bankruptcy is filed.
Allow the debtor to keep a house or car without paying.
Allow the debtor to discharge debts the court decides he can afford to pay.
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