Consumer Bankruptcy

Individual and business Bankrupty

Individual Consumer Bankruptcy – Chapter 7 or Chapter 13?

Individual consumers considering a bankruptcy filing should review all available options. Generally, the two types of bankruptcy filings available to individual consumers are Chapter 7 and Chapter 13. There may be situations that require Chapter 11 relief for individuals and our attorneys can and do file Chapter 11 cases for those best suited to that option. However, because the vast majority of individuals are better suited to Chapter 7 and Chapter 13, the following is provided as a brief overview for informational purposes. Every individual is different.

There are several situations where a Chapter 13 is preferable to a Chapter 7. A Chapter 13 bankruptcy is the best choice if you are behind on your mortgage or secured loan payments and want to keep your home at the end of the bankruptcy process. A Chapter 13 bankruptcy allows you to make up the overdue payments over time and to reinstate the original mortgage agreement. In general, if you have valuable property not covered by your bankruptcy exemptions that you want to keep, a Chapter 13 filing may be a better option. Also, people file Chapter 13 bankruptcy because they have too much income to qualify to file for Chapter 7 relief or have the kind of debt that is nondischargeable in a Chapter 7, like certain tax debts.

However, for the vast majority of individuals who simply want to eliminate their unsecured debt burden without a plan of repayment, Chapter 7 provides the most attractive choice.

Advantages to a Chapter 7 filing:

  1. You receive a complete fresh start. After the bankruptcy is discharged the only debts you owe will be for secured assets for which you choose to sign a "Reaffirmation Agreement" and for any nondischargeable debts.
  2. You have immediate protection against creditors' collection efforts and wage garnishments on the date of filing.
  3. Wages you earn and property you acquire (with few exceptions) after the bankruptcy filing date are yours and not property of the bankruptcy estate.
  4. There is no minimum or maximum amount of debt required.
  5. Your case is often over and completely discharged in about four months.

Disadvantages to a Chapter 7 filing:

  1. You may lose property that can be sold by a trustee. If you want to keep a secured asset, such as a car or home, and it is not completely covered by your available exemptions, then Chapter 7 is not your best option.
  2. If facing foreclosure on your home, the automatic stay created by your Chapter 7 filing may only serve as a temporary defense against foreclosure.
  3. Co-signors of a loan may be liable for your debt unless they also file for bankruptcy protection.
  4. If you filed a prior case and received a discharge of your debts, you can only file a second Chapter 7 bankruptcy case eight years after you filed the first case.

Advantages to a Chapter 13 payment plan:

  1. If you can afford the payment plan, you can keep all your property, exempt and nonexempt.
  2. You have immediate protection against creditors' collection efforts and wage garnishments.
  3. During the pendency of your Chapter 13 case, any co-signers on consumer debt are also protected from creditors' collection efforts.
  4. You have protection against foreclosure on your home by your lender as long as you meet the terms of the plan.
  5. You have more time to pay debts that cannot be discharged in bankruptcy, such as taxes and past due child support.
  6. You can separate your creditors by class where different classes of creditors receive different percentages of payment.

Disadvantages to a Chapter 13 payment plan:

  1. You create a payment plan where you use your post-bankruptcy income. This ties up your income over the Chapter 13 plan period.
  2. You are involved in the bankruptcy court process for the term of the three- to five-year plan.

Chapter 7 Information

In a Chapter 7 bankruptcy, an Order of Discharge can wipe out your unsecured debts and give you a "Fresh Start." Chapter 7 bankruptcy is actually a liquidation where an appointed trustee can collect and sell your nonexempt assets. The net proceeds of the liquidation of nonexempt property are then distributed to your creditors with a commission taken by the trustee overseeing the distribution.

Certain debts cannot be discharged in a Chapter 7 bankruptcy. Examples of some nondischargeable debts include alimony, child support, debts procured through fraud, certain taxes, most student loans, and certain items charged in the 90 days preceding a filing. In most Chapter 7 cases, the debtor has large credit card debt and other unsecured bills, but very few assets. In the vast majority of cases, a Chapter 7 bankruptcy is able to completely eliminate all debts.

Debts secured by personal property, such as vehicles or boats, require the debtor to indicate his/her intent with respect to that property and that particular debt. You may be asked to reaffirm certain secured debts in order to retain the property associated with those debts. To do so, you would need to sign a voluntary "Reaffirmation Agreement." If you choose to reaffirm a debt, and the court approves that reaffirmation, your personal obligation to repay that debt will survive the bankruptcy and any discharge you receive. You will still owe that debt and you must continue to pay it just as you were obligated to continue to pay it before you filed bankruptcy. In order to reaffirm the debt, you must also bring it current. In other words, if you are behind on payments, you must pay the back payments that are due in order to reaffirm the debt. The decision to reaffirm or not reaffirm debts will have repercussions beyond the bankruptcy filing and should be discussed with an attorney.

Chapter 13 Information

Under a Chapter 13 bankruptcy, a debtor proposes a three- to five-year repayment plan to his creditors offering to pay off all or part of the debts from the debtor's future income. You can use Chapter 13 to prevent a house foreclosure, make up missed car or mortgage payments, pay back taxes, keep valuable nonexempt property, and more. If you can stick to the terms of your repayment agreement, almost all of your remaining unsecured debt may be discharged at the end of the plan. The amount to be repaid is determined by several factors, including the debtor's disposable income, which is usually determined as part of the Means Test. In addition, the total amount paid to creditors under the Chapter 13 plan must also be at least as much as creditors would have received if the debtor filed a Chapter 7 bankruptcy. To file Chapter 13 bankruptcy you must have a regular source of income and have some disposable income to apply toward your Chapter 13 payment plan.

Chapter 13 bankruptcy is generally used by debtors who want to keep secured assets, such as a home or car, when they have more equity in the secured assets than they can protect with their available exemptions. Chapter 13 bankruptcy is a reorganization, unlike Chapter 7 which is a liquidation.

A Chapter 13 bankruptcy allows homeowners to make up their overdue payments over time and to reinstate the original agreement. Where a debtor has valuable nonexempt property and wants to keep it, a Chapter 13 may be a better option. However, for the vast majority of individuals who simply want to eliminate the heavy burden of unsecured debt without entering into a repayment plan, Chapter 7 provides the most attractive choice.

We can help you decipher the options for bankruptcy relief and decide which chapter is best suited to your needs. To learn more, contact us.