Chapter 7 Bankruptcy – For a Fresh Start
Chapter 7 is commonly referred to as a liquidation bankruptcy that discharges most unsecured debt, including but not limited to, credit cards, medical bills, past-due rent, payday loans, unsecured personal loans, large back utility bills, and deficiency balances left over after a car has been repossessed. Generally, Debtors who file for Chapter 7 have a current financial situation where, if they take their income and subtract their mortgage, rent, car payments, and monthly living expenses, they have no leftover money to pay their unsecured debt. In Chapter 7, there is no repayment plan to pay your debts. To qualify for Chapter 7 bankruptcy, there are certain income guidelines you must meet. If you make too much money, you can still obtain relief by filing Chapter 13 (discussed below).
At the moment you actually file Chapter 7, an order called the “automatic stay” goes into effect to immediately stop creditors from continuing to collect debts from you. At the time of filing, a bankruptcy trustee is appointed to administer your case. The Trustee’s job is to review your bankruptcy papers and supporting documents as well as sell any “nonexempt” assets and pay proceeds to your creditors. Most debtors do not have any nonexempt property. If you do not have any nonexempt property to sell, the creditors do not receive anything. What Debtors are seeking in Chapter 7 is a “discharge” of their debts, which comes in the form of a court order, sent to the Debtor and all of the creditors, stating that they no longer owe those debts.
Chapter 13 Bankruptcy – To Get Back on Track
Chapter 13 is commonly referred to as a reorganization bankruptcy. It was created for debtors with regular income who have some money left over each month to pay back all or at least a portion of their debts through a repayment plan. Many Chapter 13 filers make too much money to qualify for Chapter 7. Many Chapter 13 filers choose to file because it offers many benefits not available in Chapter 7, including but not limited to allowing the filer to stop foreclosure to catch up on missed mortgage payments and generally repay car payments at a lower payment than they are currently paying.
In Chapter 13 bankruptcy, you retain all of your property (including nonexempt assets—however you are required to pay creditors an amount equal to the value of your nonexempt property). In exchange for keeping all of your property, you make payments to a trustee who will, in turn, pay your creditors for you through a repayment plan. The amount you must pay back will depend on your income, expenses, and the various types of debts that you have.
Chapter 13 bankruptcy is usually filed by debtors who:
- Do not qualify for Chapter 7 but need relief from a collection, foreclosure, to lower their credit card payments, stop lawsuits, garnishment of wages and attachment of bank accounts,
- Have debt that they cannot discharge, generally back taxes and student loans, that they are happy to pay off if they have three to five years in a plan to do so,
- Have missed mortgage and/or auto payments and want to get caught up on these debts to keep the property but cannot do so in one lump sum outside of Chapter 13.
