Chapter 7 Bankruptcy
Chapter 7 is the most common bankruptcy filing and is normally referred
to as a "liquidation bankruptcy". Although the vast majority of filers
are individuals, in some situations it is an option for partnerships
and corporations. However, when used by businesses, Chapter 7 ordinarily
results in the termination of the business entity and so is normally
avoided. Also, complete "discharge" of debt under Chapter 7 is only
available to individual debtors. This is a liquidation process were
the persons nonexempt property is liquidated (sold) for distribution
to the creditors. The debtor then receives a discharge of all dischargeable
debts.
Individuals filing for Chapter 7 are usually in very bad financial
condition with large credit card and other secured and unsecured debt.
They normally do not own a lot of assets which can be liquidated and
so do not have as much to lose. In the vast majority of cases most people
are able to completely eliminate, most or all of their debts.
As mentioned, one of the main reasons for filing for bankruptcy is
to stop the harassment from the creditors. After your bankruptcy is
filed, the court mails a notice to all the creditors listed in your
schedules. This usually takes a couple of weeks, but once a creditor
or bill collector becomes aware that you have filed for bankruptcy protection,
they must stop all efforts to collect the debt. This is one of the benefits
of filing for bankruptcy and can help stop harassment.
There are many debts that are not dischargeable and that you will still
be responsible for after the bankruptcy. In most cases the following
debts will not be discharged: taxes; spousal and child support; debts
arising out of willful misconduct and or malicious misconduct by the
debtor; liability for injury or death from driving while intoxicated;
non-dischargeable debts from a prior bankruptcy, student loans and debts
that were induced or extended by fraud or criminal activities. Under
bankruptcy law, certain luxury purchases and cash advances over $1,000
are presumed non-dischargeable within 60 days of the bankruptcy filing.
The courts can go back over any charitable donations over the past 2
years and judge whether they are legitimate or not. If not you could
be liable to recover the money from the charity.
To be eligible to file for chapter 7 you must not have been granted
a Chapter 7 discharge within the last 6 years or completed a Chapter
13. You also must not have had a bankruptcy filing dismissed for cause
within the last 180 days. Generally speaking, if after paying all necessary
monthly expenses there is not enough money to pay the remaining monthly
debts, then granting a discharge would not be an abuse of Chapter 7.
Chapter 13 Bankruptcy
The main difference between Chapter 13 and Chapter 7 is Chapter 13 enables
a debtor to retain certain assets that would otherwise be liquidated
in Chapter 7. In most cases, you can keep your home and car under either
plan (provided your equity does not exceed certain limits). Under Chapter
7, however, you won't be able to keep rental properties, antique collections,
etc. which you can retain under Chapter 13.
A chapter 13 bankruptcy is normally for people who have too much income
to file a chapter 7 or have a large amount of non-dischargeable property.
Chapter 13 bankruptcy is for individuals, or small business owners,
who desire to repay their creditors but are in financial difficulty.
It protects individuals from the collection efforts of creditors and
permits individuals to keep their real estate and personal property
as well as providing the opportunity to repay their debts through reduced
payments.
Under this bankruptcy, the trustee proposes a 3-5 year repayment plan
to the creditors, offering to pay off all or part of the debts from
the debtors' future income. The trustee works out how much you can afford
to pay per month, above and beyond necessary living expenses (including
insurance, mortgage payments, food, etc.) You must have regular income
and have some disposable income. This amount is then dispersed among
your creditors according to what is owed to each by the trustee. If
all payments are made, at the end of the agreed upon period, you are
discharged from all the dischargable unsecured debts.
The main problem with chapter 13 is that in some cases you could end
up paying back 50% or more of the debt, in some states the entire amount
of the debt, and forced by the courts to make the payments. If you then
miss a payment you could end up in breach of court and forced to pay
the whole debt. You can stop the collection efforts using chapter 13
but why would you want to tie yourself into making payments by the courts?
Because you are paying your creditors with chapter 13 bankruptcy, it
shows on your credit report for a shorter time period than a chapter
7. You also gain certain advantages over a chapter 7 such as you may
be able to discharge debts in a chapter 13 that would be non-dischargeable
under other chapters, for example, fraud judgments. You also have the
ability to eliminate junior liens from your mortgages under certain
circumstances and restructure other payments.
Two Other Types of Bankruptcy
Chapter 11 is generally used by businesses and commonly called "reorganization"
bankruptcy. Individuals are sometimes allowed to use Chapter 11 if they
have very large federal or state tax debts. For businesses, Chapter
11 is a chance to keep operating the business under a Reorganization
Plan. This plan is sometimes complex and requires the cooperation of
all parties involved -- the debtor, the creditors, and the trustee.
Because it is an ongoing process headed toward a certain goal down the
road, a Chapter 11 proceeding is likely to be more complicated and time-consuming
than a Chapter 7. A Chapter 11 filing can be either "voluntary" (coming
from the debtor) or "involuntary" (coming from the distressed creditors).
Chapter 12 is the "farmer" chapter. This chapter was enacted by Congress
in 1986. The farmer must have a regular income, although the seasonal
nature of the business is taken into account by the court. Chapter 12
is somewhat similar to a Chapter 11, but more streamlined and less expensive
and complicated. It was deliberately designed by the legislators to
help out large numbers of distressed family farmers. A Chapter 12 filing
can only be "voluntary" (coming from the farmer), not "involuntary"
(coming from the farmer's creditors).
The information contained herein is accurate to the best of our knowledge
and is provided for general information purposes only. This is not intended
to be a legal opinion, legal advice nor is it intended to be complete
information on the subject of bankruptcy. If you are considering filing
for bankruptcy, we recommend using the services of a professional bankruptcy
attorney.
Options Other than Bankruptcy
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