Individual Bankruptcy

Individual Consumer Bankruptcy – Chapter 7 or Chapter 13?

Individual consumers considering a bankruptcy filing should review all available options, which generally include Chapter 7 and Chapter 13 bankruptcy filings. While there may be situations that require Chapter 11 relief for individuals—which our attorneys also handle—most individuals are better suited to Chapter 7 and Chapter 13 filings, and so the following is provided as a brief overview for informational purposes. Every individual is different.

In a Chapter 7 bankruptcy, an Order of Discharge can wipe out your unsecured debts and give you a “fresh start,” but may not protect your secured assets. 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, allowing you to keep all exempt and nonexempt property.

Chapter 7 Filing Advantages:

1. You receive a completely 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.

Chapter 7 Filing Disadvantages:

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, 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.

Chapter 13 Payment Plan Advantages:

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 certain taxes and past due child support.
6. You can separate your creditors by class where different classes of creditors receive different percentages of payment.

Chapter 13 Payment Plan Disadvantages:

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.

This is not an exhaustive explanation of individual bankruptcy options. Always consult an attorney to determine the option best suited to your unique situation. The bankruptcy attorneys at YVS Law can help you decipher the options for bankruptcy relief and decide which chapter is best suited to your needs. To learn more, contact us.