Bankruptcy Options

For "consumers," e.g. people whose debt is primarily personal debt accumulated due to the purchase of consumer goods rather than business debt, there are two types of bankruptcy relief available: Chapter 7 and Chapter 13.

A Chapter 7 bankruptcy can be thought of as the "classic" or "traditional" form of bankruptcy where an individual or a married couple filing jointly, asks the federal bankruptcy court to issue a final court order permanently enjoining his/her/their creditors from attempting to collect the debt owed; forever. The "Order of Discharge" is the ultimate goal in both a Chapter 7 and a Chapter 13 bankruptcy case; terminating lawsuits, wage garnishments, accruing interest, late fees and over limit fees. In just ninety days after filing a petition in bankruptcy, the net result is a Discharge of your unsecured debt, allowing you to move forward without the pressure and disruption of collection efforts, permitting you to save for the future and EARN A FRESH START.

A Chapter 7 bankruptcy is usually completed in 90 to 100 days. A series of documents collectively referred to as a "petition" that contain sworn statements and schedules of assets, income, expenses and debt is filed with the court. You are allowed to keep a generous but limited amount of your assets in order to facilitate your "fresh start." In most cases, you can keep your home, your cars, your personal belongings, your retirement accounts, the clothes on your back and the food in your refrigerator. If the value of your assets exceed the statutory limit you may be required to surrender some of those assets to earn a discharge of your debt, or at your option, pay an equivalent value into a Chapter 13 bankruptcy Plan.

A Chapter 13 bankruptcy can be thought of as a "customized" or "adjustment of debts for an individual with regular income" bankruptcy. In a Chapter 13 bankruptcy, a "Plan" is proposed to pay money into a general pot over 36-60 months to be distributed by a managing "Trustee". The Trustee is charged with the responsibility of distributing money from the general pot to priority creditors in full (past due income taxes, property taxes, past-due house payments, etc.) and the remainder, on a pro-rata basis, to one's unsecured creditors. When all the payments have been made and all the money is distributed according to the Plan, the bankruptcy court issues a final court order permanently enjoining the unsecured creditors who received less than 100% of what they were owed from attempting to collect the difference.

While making payments into the Plan, the unsecured creditors are prohibited from charging interest, late fees and over limit fees. The payments they receive through the Trustee's distribution are applied 100% toward principal.

In a very real and legal sense, Chapter 7 and Chapter 13 bankruptcies are identical in their net result: a Discharge of your unsecured debt, allowing you to move forward without the pressure and disruption of collection efforts, permitting you to save for the future and EARN A FRESH START. The two chapters of bankruptcy available to consumers are identical because the net result is that each of your unsecured creditors end up being treated the same way in either instance.

On its face there appears to be two options available to consumers under bankruptcy: Chapter 7 or Chapter 13. However, the choice you may end up making will depend on your particular set of circumstances and needs. For obvious reasons, the majority of people contemplating bankruptcy will logically choose the shortest or quickest path to a Discharge of Debt; Chapter 7.

While a thorough analysis of your financial status is necessary to come to any final conclusions about which Chapter will benefit you the most, here are some common reasons why you might choose a Chapter 13 payment Plan rather than the more immediate Discharge of Debt available under a Chapter 7:

• Appearance of the Ability to Pay (§707(b)) Chapter 13
  Even if you qualify to file under Chapter 7 you may choose (or be forced into) a Chapter 13 if, after balancing your take home pay against your actual, allowed living expenses, you have sufficient net disposable income to pay at least 25% of your unsecured debt over a 5 year Plan.
• Over Median Chapter 13
  On October 17, 2005 Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act which, among other things, implemented an income threshold and means test to create a presumption that people seeking relief under bankruptcy law were abusing their right to do so if they earn gross wages in excess of IRS and Census Bureau standards. See Do I Qualify for those standards.
• Prior Chapter 7 in Past 8 Years
  If you received a discharge of your debt in a Chapter 7 case filed (not discharged) less than 8 years ago, you may not file another and must choose a Chapter 13 if you are seeking protection again (certain other restrictions also apply).
• Over Exempt Asset Chapter 13
  As mentioned above, you are allowed to keep a generous but limited amount of your assets in order to facilitate your "fresh start." Sometimes the value of one's assets exceeds those limits. If this happens, one of three options is available. First, you can choose not to file a case in bankruptcy at all. Try to sell or borrow against your assets and use the money to settle your other debt. Second (assuming you qualify) you can file a Chapter 7 case and surrender the over exempt assets to the Trustee for distribution to you unsecured creditors on a pro rata basis. Finally, if you would rather not surrender your over exempt assets, you can file a Chapter 13 payment Plan case and, treating your unsecured creditors the same way they would have been treated had you chosen to file a Chapter 7, pay into the Chapter 13 pot, the same amount that would have been paid for the creditors' benefit - the over exempt asset amount - but over time, and in an amount your budget can afford.
• "Save the Home" Chapter 13
  One of the most useful types of Chapter 13 bankruptcy case is the ability to pay back past due house payments over enough time and at a monthly payment amount that your budget can afford and prevent the foreclosure and sale of your home.