Chapter 7 Bankruptcy
What is Chapter 7 Bankruptcy?
Chapter 7 of the Title 11 of the United States Code (Bankruptcy Code) governs the process of liquidation under the Bankruptcy laws of the United States.
So by definition Chapter 7 Bankruptcy is a liquidation of all assets and debts. The Bankruptcy trustee will liquidate or sell your assets and disburse the proceeds to your creditors. Once all assets have be liquidated and disbursed all of your debts will be discharged and no longer collectible by your creditors. Or in plain English, Chapter 7 Bankruptcy means all of your debt is gone. You are free of your creditors and able to move forward with your life with a clean slate.
There are many exceptions, exclusions and caveats to the plain English definition, but it is accurate enough for our purposes. Many people are afraid of Bankruptcy. They see it as proof that they have failed. They see it as the end of their financial livelihood. They assume that they will never be able to do anything with debt every again, and in our society there is very little done with out debt.
Here is the Good News. Those people are mostly wrong. Chapter 7 Bankruptcy is a beginning not and ending. By filing you are making the first step to getting your financial house back in order. Let’s explore some of these misconceptions. There are many reasons people end up in Chapter 7. Some are the result of poor choices. They ran up too much credit card debt over foolish purchases. They lived beyond their means by charging their lifestyle and using debt to pay debt. This is a cycle that will always end in failure. It is not possible to borrow indefinitely to pay debt. Other people end up in Bankruptcy due to circumstance beyond their direct control or foresight. Whether it is a debilitating injury or illness, unemployment, business failure, investment losses, or just plain bad luck, most people who find themselves in Bankruptcy are often victims of circumstance. Chapter 7 Bankruptcy becomes the tool to fix their problem. Since Chapter 7 is a liquidation of all assets, people with a large amount of assets rarely file chapter 7. Chapter 7 allows those people who have lost everything to hit the reset button by giving everything they have left to their creditors. Secured creditors receive their security. Car loans get the cars. Mortgage companies get the houses. Any equity not used to satisfy those creditor as well as any other assets that are liquidated will then be distributed to unsecured creditors.
The important thing here is that there are exceptions to the assets that creditors can claim. Each state has different rules for Chapter 7 exceptions. We will be adding more information about exemption sin future articles. Be sure to understand what you can and cannot keep through a Chapter 7 Bankruptcy. Also, there are certain debs that are not discharged. Alimony and child support, Student loans (usually), fines and restitution imposed for crimes, and income taxes less than 3 years old.
Chapter 7 Bankruptcy will also be a blow to your credit. However, by removing all of your bad debts, you are able to begin rebuilding it immediately. Many people are able to qualify for mortgages and car loans within a relatively short amount of time after discharge.
Chapter 13 Bankruptcy
Chapter 13 Bankruptcy filing is a way for individuals in the United States to undergo a financial reorganization supervised by a federal Bankruptcy court. The Bankruptcy Code anticipates the goal of Chapter 13 as enabling income-receiving debtors a debtor rehabilitation provided they fulfill a court-approved plan. Compare the goal of Chapter 13 with the relief contemplated in Chapter 7 that offers immediate, complete relief of many oppressive debt(s).
In simpler terms, Chapter 13 Bankruptcy allows you to have relief from creditors, but still allows (requires) you to pay them back in a plan approved by the court. You would no longer receive calls or letter harassing you. You will be able to apply a certain portion of your income to paying your creditors without being afraid of confiscatory actions like garnishment or asset seizure. There are few advantages for using Chapter 13 vs Chapter 7. You still have filed Bankruptcy. It will still be on your credit for 10 years. However, one spouse can file 13 and “shield” the other spouse from creditors. If you have filed chapter 7 recently, Chapter 13 may also be your only option.
Further, if you fail the means test implemented a few years ago, you will be required to file Chapter 13. Explanation of the means test is found in a future article. In a chapter 13 filing the trustee will approve a repayment plan that lasts for 5 years. Once the plan has been completed, all remaining debts will be discharged and you will have a fresh start. A Chapter 13 filing will not halt all creditors from ultimately seizing assets. It will stall a foreclosure or repossession, but will not stop it indefinitely. If you are able to resume normal payments it is possible to retain the assets.
Because of the time frame associated with a Chapter 13, many people will be happier with a Chapter 7 filing. For the 5 year term of the plan, most creditors will not extend more credit to a borrower. Someone in a Chapter 13 will not be able to rebuild their credit for quite some time. Most lenders only consider the discharge date of a Bankruptcy, not the date of filing. A chapter 13 is not discharged until the end of the five year plan.
Because of the complexity of a chapter 13 filing, we encourage clients to use an attorney while filing. You will be living with the plan for five years and if you do it wrong the consequences will be long lasting. One thing to be mindful of, a Chapter 13 can be converted into a Chapter 7 at any time. The means test applies, but if that is passed, then the client may convert to a Chapter 7 and discharge the debt fully.
In future articles we will explain the lengthy process of determining which type of Bankruptcy filings are available to you. We will discuss how exemptions are applied on both a state and Federal level. We will also discuss how to convert a Chapter 13 to a Chapter 7. The one subject that is rarely discussed to how to cancel a Bankruptcy filing, therefore we will devote a number of articles to the method and consequences of such an action.