Most people considering filing for bankruptcy will ask: What is bankruptcy? What is the difference between Chapter 7 and Chapter 13? Which option is best for me? Your bankruptcy attorney will be able to advise you as to which bankruptcy chapter best suits your needs.
What Is Chapter 7 Bankruptcy?
Chapter 7 is the more traditional type of bankruptcy, and is often referred to as a “liquidation” or “straight” bankruptcy. In a Chapter 7 proceeding, the Court appoints a trustee to oversee your case. The trustee has the responsibility of:
- determining if you have any assets that are not considered exempt under the law
- selling such assets
- using to proceeds to distribute among creditors
The ability to exempt assets in bankruptcy depends on two things.
- First, how much the assets are worth
- Second, what state or states have you lived in over the course of the three years prior to the filing of your bankruptcy petition
During the initial consultation, most firms will quickly determine whether or not you are likely to have any non-exempt assets. The fact is that well over 95% of Chapter 7 cases are called “no-asset” cases. This means that there are no assets to distribute to creditors.
Meeting of the Creditors in a Chapter 7
Roughly 30 days after the filing of a Chapter 7 case, you have an obligation to attend a brief hearing with the trustee called the “341(a) hearing,” or “meeting of creditors” or. The hearing is usually less than five minutes long and attended by none of your creditors. At the hearing, the trustee will ask a series of questions to find out if any non-exempt assets exist, or if there are any legal issues or problems with the case. Because most bankruptcy firms anticipate these questions prior to the filing of the case, there are rarely any surprises. Generally within two months after the conclusion of the meeting, you will receive a notice through the mail indicating that debts have been discharged.
Dischargeable Debts in Bankruptcy
While most debts are dischargeable in bankruptcy, there are several exceptions, the most common of which are:
- Debts incurred by means of fiduciary misconduct, malicious and willful injury, or embezzlement.
- Most federal and state income taxes. However, if the taxes are more than three years old, and they meet other criteria, some taxes can be discharged in bankruptcy. Some taxes that cannot be discharged in Chapter 7 can be dealt with in a Chapter 13 bankruptcy.
- Student loans and other educational debts. The Bankruptcy Code allows for a discharge of student loans upon the showing of “undue hardship.” However, that section is construed so narrowly such that it is extremely difficult to discharge student loans in bankruptcy.
- Personal injury or death caused to others while driving under the influence of alcohol or drugs.
- Debts incurred by fraud such as debts incurred without the intent to repay or debts incurred by use of a false financial statement or other written document.
- Criminal fines, criminal restitution and traffic tickets.
- Child support and spousal support.
- Divorce decree judgments.
With secured debts such as home loans and vehicle loans, you must normally either keep paying on the debt and keep the property (and discharges the entire obligation owed to the secured creditor).
What Is Chapter 13 Bankruptcy?
Chapter 13 Bankruptcy is a debt repayment plan. In this type of bankruptcy, a “Chapter 13 Plan” is filed with the Court. Under the Chapter 13 Plan you will pay back some part of what you owe over the course of a three to five year period. You will likely continue to pay your ongoing mortgage and car debts on your own. However, you will avoid having to make a series of payments every month to all your remaining creditors. Instead, you can make one monthly payment to the trustee who, in turn, will distribute available funds to these creditors. Though there are exceptions to this rule, the size of your payment will largely hinge on the amount of your household income and expenses.
If you have money left over after you deduct your monthly living expenses, such as entertainment, gas, car payment, mortgage, etc., from your monthly net income, that amount will be distributed by the trustee to your creditors. Of course the amount that is left over every month and distributed to your creditors over the course of 36, or even 60 months is rarely going to come close to what you actually owe. Moreover, in a Chapter 13, you are no longer responsible for paying off the sort of ridiculous penalties and interest charges that you would otherwise have to pay during the same time span if you were not in a chapter 13 payment plan.
Why File Chapter 13?
Common reasons for you to file Chapter 13 are:
- Protect assets that you might lose in a Chapter 7 case because you have too much too much equity.
- Pay non-dischargeable debts (most often taxes and child support) through a Chapter 13 Plan as opposed to what the creditor might demand.
- Prevent a foreclosure on a home, or a repossession of a car or other secured property
- Obtain a discharge of certain debts that are not dischargeable in Chapter 7.
- Consolidate debts and pay as much as possible over the term of the Chapter 13 Plan without interference from creditors.
- “Rewrite” auto loans when the value of the vehicle is less than the amount owed.
- Obtain debt relief when you filed a Chapter 7 case within the past 8 years.
- If your income is in excess of certain limits.
Meeting of the Creditors in a Chapter 13
A meeting of creditors is held with the Chapter 13 Trustee about 30 days after filing. During that meeting, the Chapter 13 Trustee will ask some pretty simple questions about your situation in order to make sure that the proposed Chapter 13 Plan complies with legal requirements. As with Chapter 7, this hearing usually lasts about five minutes. Usually, none of your creditors attend the hearing.
Approximately one month after the creditor’s meeting, the Bankruptcy Court will hold a hearing to confirm the Chapter 13 Plan. The debtor rarely needs to attend that hearing. The court will confirm the Plan unless the Chapter 13 Trustee or one of the creditors has some objection to it. If they file objections, you can usually resolve them through negotiation with the objecting party so that you can have the Plan confirmed.
Are There Drawbacks to Filing Chapter 13?
While Chapter 13 can be a very powerful tool for the debtor, Chapter 13 relief does come with some drawbacks:
- A Chapter 13 debtor is prohibited from incurring debt while the case is active without the approval of the Chapter 13 Trustee.
- Payments may increase if income increases while the case is active. The Chapter 13 (In Oregon)
- Income tax refunds normally must be turned over to the Chapter 13 Trustee during the first three years of the Plan. Earned income credit tax refunds do not have to be turned over to the Trustee.
- Trustee monitors income by requiring that copies of tax returns be provided each year.
- Fluctuation in income can make it difficult for a debtor to complete a Chapter 13 case.
- Once all of the payments are made pursuant to the terms of the Chapter 13 Plan, any remaining debts owing as of that time except child support, criminal fines and restitution, some taxes and student loans are normally discharged.
What Is Bankruptcy? Get Answers From a Bankruptcy Attorney Today
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