Chapter 7 & Chapter 13 Bankruptcy
Chapter 7 Bankruptcy
Chapter 7 Bankruptcy, also called liquidation or “straight bankruptcy,” is for individuals or businesses wishing to cease operations. A trustee will take control all of your “non-exempt” assets, liquidate them, and distribute them to creditors to pay off debts. “No-asset” cases do not involve any liquidation because all of your assets are considered exempt. Creditors will only be paid if they file proof of claim in the bankruptcy court and if the case involves non-exempt assets.
Under Chapter 7, you can usually receive a discharge releasing you from liability for repaying certain debts a few months after filing a petition. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) implemented a "means test" to determine whether individuals qualify for relief under chapter 7. You may not be eligible to file if your income is above a certain amount. (Your attorney can tell you this amount.)
Chapter 13 Bankruptcy
Chapter 13 Bankruptcy allows individuals (not businesses) to keep many assets and restructure debt (except for your primary home mortgage) if you have a regular source of income. Your attorney will work with a bankruptcy trustee to develop a plan allowing you to pay off your debt over a three to five year period. If your income is less than the state median, a three-year plan will be used to repay creditors, while a five-year plan will be used if your income is greater than the state median. At the end of that period, you will have discharged all your debt while keeping valuable assets such as a home or cars.
Chapter 13 differs from Chapter 7 in several ways.
It can be used by debtors who do not qualify for chapter 7 under the means test. Under chapter 13, you usually are able to keep your property and make payments to creditors through the trustee, based on your anticipated income over the life of the plan. Unlike chapter 7, you must complete the payments required in the plan before any discharge is received. The discharge is also somewhat broader (more debts are eliminated) under chapter 13 than under chapter 7. No creditors are allowed to contact you directly, and you are protected from lawsuits, garnishments, and other creditor actions while the plan is in effect.
INSIDER TIP: If you choose Chapter 13, you must have enough income to pay BOTH a mortgage payment and a monthly bankruptcy plan payment.
So what are the steps involved with these two chapters? We will talk about the process in Issue 3 of The Smart Guide to Bankruptcy.
See you then!
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