Bankruptcy

There are two primary types of personal bankruptcy: Chapter 13 and Chapter 7. Each must be filed in federal bankruptcy court

In Chapter 7 bankruptcy, you ask the bankruptcy court to discharge most of the debts you owe. In exchange for this discharge, the bankruptcy trustee can take any property you own that is not exempt from collection (see below), sell it, and distribute the proceeds to your creditors. For more information on Chapter 7, see A Chapter 7 Bankruptcy Overview.

In Chapter 13 bankruptcy, you file a repayment plan with the bankruptcy court to pay back all or a portion of your debts over time. The amount you’ll have to repay depends on how much you earn, the amount and types of debt you owe, and how much property you own. For more information about Chapter 13, see An Overview of Chapter 13 Bankruptcy.

You lose no property in Chapter 13 bankruptcy, because you fund your repayment plan through your income. In Chapter 7 bankruptcy, you select property you are eligible to keep from a list of state exemptions.

Chapter 13 allows persons with a steady income to keep property, like a mortgaged house or a car that they otherwise might lose. In Chapter 13, the court approves a repayment plan that allows you to use your future income to pay off a default during a three-to-five-year period, rather than surrender any property. After you have made all payments under the plan, you receive a discharge of your debts.

Known as straight bankruptcy, Chapter 7 involves liquidation of all assets that are not exempt. Exempt property may include automobiles, work-related tools and basic household furnishings. Some of your property may be sold by a court-appointed official (a trustee) or turned over to your creditors. You can receive a discharge of your debts through Chapter 7 only once every six years.


The most striking difference is that a Chapter 7 lasts about 3 1/2 months, during which time you make no payments to the Court (and to qualify for Chapter 7 you must show that you have no money left over each month to make payments), whereas a Chapter 13 lasts from 3 to 5 years, and during that time you make monthly payments to the Court (because you have more income than expenses). There are two primary types of personal bankruptcy: Chapter 13 and Chapter 7. Each must be filed in federal bankruptcy court

In Chapter 7 bankruptcy, you ask the bankruptcy court to discharge most of the debts you owe. In exchange for this discharge, the bankruptcy trustee can take any property you own that is not exempt from collection (see below), sell it, and distribute the proceeds to your creditors. For more information on Chapter 7, see A Chapter 7 Bankruptcy Overview.

In Chapter 13 bankruptcy, you file a repayment plan with the bankruptcy court to pay back all or a portion of your debts over time. The amount you’ll have to repay depends on how much you earn, the amount and types of debt you owe, and how much property you own. For more information about Chapter 13, see An Overview of Chapter 13 Bankruptcy.

You lose no property in Chapter 13 bankruptcy, because you fund your repayment plan through your income. In Chapter 7 bankruptcy, you select property you are eligible to keep from a list of state exemptions.

Chapter 13 allows persons with a steady income to keep property, like a mortgaged house or a car that they otherwise might lose. In Chapter 13, the court approves a repayment plan that allows you to use your future income to pay off a default during a three-to-five-year period, rather than surrender any property. After you have made all payments under the plan, you receive a discharge of your debts.

Known as straight bankruptcy, Chapter 7 involves liquidation of all assets that are not exempt. Exempt property may include automobiles, work-related tools and basic household furnishings. Some of your property may be sold by a court-appointed official (a trustee) or turned over to your creditors. You can receive a discharge of your debts through Chapter 7 only once every six years.

The most striking difference is that a Chapter 7 lasts about 3 1/2 months, during which time you make no payments to the Court (and to qualify for Chapter 7 you must show that you have no money left over each month to make payments), whereas a Chapter 13 lasts from 3 to 5 years, and during that time you make monthly payments to the Court (because you have more income than expenses).

By far the most common form of bankruptcy, chapter 7 is a relatively short and straightforward process that allows you to wipe out most, if not all, of your debt. Below is a brief summary of chapter 7 bankruptcy basics, but to learn about how to best address your situation, call an experienced bankruptcy attorney to set up a free consultation.

Chapter 7 is open to most individuals and businesses that haven’t filed a previous bankruptcy in the past 6 – 8 years. Unless you fall under one of a few exemptions (current or recent active military service, for example) you must qualify to file under chapter 7 based on your income. The primary test to determine whether or not you qualify for a chapter 7 bankruptcy is to compare your “current monthly income” to the median income for your state. If you make less than the state median you’ll almost always qualify for a chapter 7, but don’t be discouraged if you make more. If so, you have a second opportunity to qualify under the “means test”. An experienced bankruptcy attorney knows the means test inside and out and will help you to get the best result possible. If you still don’t qualify, you can consider filing a chapter 13 bankruptcy which has some benefits not available under chapter 7.

A bankruptcy filing under Chapter 7 allows individuals to eliminate most unsecured debts. The main reason for filing any bankruptcy case is to obtain a “discharge” or release of debts. In a Chapter 7 case, the debtor is not required to pay any of the debts owed to most unsecured creditors, but may elect to reaffirm (remain personally liable to pay) specific debts.

In approximately 99 percent of all consumer Chapter 7 cases, the debtor will keep all property, and eliminate most debts. The entire process is normally over, and the case is closed, within approximately 4 months after it is filed.

After the bankruptcy is over, the debtor is legally entitled to selectively pay any or all of her debts, if she feels a moral obligation to pay. However, the debtor cannot be legally compelled to pay any discharged debt, and creditors are legally required to stop all collection efforts, including all collection calls, letters, lawsuits and garnishments on any discharged debts.


The following is a fairly simplified overview of the process. There are exceptions to many of the following statements. This is intended to simply give the reader a general overview of the process.

  • Debtor is the person who files bankruptcy who owes money to the creditors
  • Creditors are anyone claiming that the debtor owes money to them
  • Bankruptcy Judge presides over any hearing & takes control of any disputes related with the case
  • Court trustee is responsible for administering the proceedings. The basic purpose of the panel trustee is to serve as an investigator for the court. In 99 percent of all Chapter 7 cases, the debtor will never see a bankruptcy judge. The debtor will appear before a judge only if a serious question is raised about the case. In virtually all Chapter 7 cases, the trustee (or the trustee’s staff) is the only person that will review the case

At the moment of the Chapter 7 filing, the trustee has control over virtually all of what the debtor owes. As a result, at the moment of filing for Chapter 7 bankruptcy puts into effect an “Order for Relief” — known informally as the “automatic stay.” The automatic stay immediately stops most creditors from trying to collect what you owe them. So, at least temporarily, creditors cannot legally grab (“garnish”) your wages, empty your bank account, go after your car, house, or other property, or cut off your utility service or welfare benefits

Just as importantly, virtually all of what the debtor owns is in the hands of the bankruptcy court. Virtually everything of any possible value which the debtor owns, holds or may be entitled to receive is property of the bankruptcy estate. This includes land, vehicles, and other personal property. It also includes all intangible property, such as damage claims the debtor may have against others (e.g., the debtor’s right to sue people – even if the debtor has not already filed the lawsuit), accounts receivable (debts owed to the debtor by others) or the debtor’s right to receive commissions. You can’t sell or give away any of the property you own when you file, or pay off your pre-filing debts, without the court’s consent. The debtor can “exempt” out certain kinds of property, and certain specified amounts of property.

In almost all Chapter 7 cases, the debtor will keep all property because it is either exempt or so low in value that the trustee will elect to abandon it (i.e. not take it from the debtor). With a few exceptions, you can do what you wish with property you acquire and income you earn after you file for bankruptcy.

Secured debts are debts on which the creditor holds a “security interest” or “lien” on specific property to secure payment of the debt. If the debt is not paid, the creditor can seize and sell the property to satisfy the debt. Most home loans, vehicle loans and department store purchases are secured debts because the contract documents will generally allow the creditor to repossess the property if the loan is not repaid.

In a Chapter 7 case, a “lien” against property will survive the bankruptcy, but the debt will be discharged. This means that the creditor can never attempt to recover the debt as a personal liability of the debtor. However, after bankruptcy, if the debt is not paid, the creditor can enforce the lien by repossessing the property, selling it, and applying the proceeds to satisfy the debt.

Index

A debtor in a Chapter 7 case will have three options for dealing with secured debt:

(a) give the property back and owe nothing;

(b) keep the property and reaffirm the debt; or

(c) redeem the property by paying the creditor, in cash, the full market value of the property.

Any Reaffirmation Agreement has to be approved by the court. Unless the debtor proves that they have enough monthly income to pay the debt, the court will routinely deny the reaffirmation agreement. It is usually a bad idea to reaffirm a debt, unless it is a vehicle needed for employment.

About a week or so after filing, the court will schedule a “Creditor’s Meeting” (also known as a “341 Meeting”) that will be approximately four weeks after the filing where the debtor’s case will be grouped with approximately 30 other similar cases presided by a single trustee. Most creditors’ meetings last about 5 minutes. The rare complex or contentious cases can last 30 minutes or more.

All creditors are invited to attend and ask the debtor questions about his debts and assets. In 99 percent of all cases, no unsecured creditors will appear at the meeting. Creditors normally come only if they believe that the debtor is guilty of misconduct sufficient to warrant a denial of discharge.

No sooner than 60 days after your 341 meeting, your debts are discharged. No sooner than 30 days after the debts are discharged, your case will be closed. Congratulations – at this point your ready to get on with your life and enjoy your fresh star