Bankruptcy Types
Chapter 13 Bankruptcy
Chapter 7 Bankruptcy
Bankruptcy Introduction
Bankruptcy is Federal law and subject to the U.S. Bankruptcy Courts. Bankruptcy law is federal statutory law contained in Title 11 of the United States Code. Congress passed the Bankruptcy Code under its Constitutional grant of authority to "establish. . . uniform laws on the subject of Bankruptcy throughout the United States. "States may not regulate bankruptcy though they may pass laws that govern other aspects of the debtor-creditor relationship. A number of sections of Title 11 incorporate the debtor-creditor law of the individual states.
There are four types of bankruptcy, two of which are reserved for individuals. While some people choose to file for bankruptcy themselves, it is generally best to have an attorney involved at some level, and preferable to let the attorney handle it completely. If things are not done properly, the cost of hiring an attorney could easily be dwarfed by the resulting cost of the mistakes.
Before filing for bankruptcy, consider whether you have any realistic alternatives. If there is any possibility of reducing your debt and paying your bills, you owe it to yourself to consider it before taking the irreversible step of personal bankruptcy.
The two types of personal bankruptcy are called Chapter 7 and Chapter 13, both named after the statutory title of the U.S. Bankruptcy Code under which they are organized.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy gives you the chance to reduce the amount you pay on debts, allowing you to keep your property that you otherwise might not be able to afford to keep, and it protects you from your creditors. A Chapter 13 bankruptcy should always be the first kind of bankruptcy that you should consider.
Chapter 13 Bankruptcy Filing Requirements
Chapter 13 bankruptcy is available to individuals who do not owe more than $250,000 in unsecured debt, or more than $750,000 in secured debt. These high limits were increased in 1994 to make Chapter 13 bankruptcy more accessible to individuals.
- Unsecured Debt
Also known as uncollateralized debt. Most debts are unsecured. This type of debt includes credit card debt, doctor and medical bills, and signature loans. When preparing a reorganization plan, unsecured debt is given the lowest priority for payment.
- Secured Debt
Also known as collateralized debt. This debt is secured with property, such as your mortgage, car, boat, and any other big-ticket item. If you default on a secured debt, the lender seizes the property to recover what is owed.
How Chapter 13 Bankruptcy Works
Chapter 13 requires you to repay your debts over three to five years. You must begin paying on the plan 30 days after you file the petition with the court.
There is a move in most districts to deduct payments to the trustee from your paycheck and send it directly to the court. However, if you not like this arrangement, the court will sometimes allow you to pay the trustee directly.
Repayment Schedule
You normally make one monthly payment to a trustee who then distributes the money to your creditors. However, Chapter 13 can tailor the payment schedule to suit your situation. For example, if you are a seasonal worker, you can pay less during the slow months and more during the months when you earn more money.
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Chapter 7 Bankruptcy
In Chapter 7 bankruptcy, most debts are wiped out and you never have to pay them. Once you discharge your debts in Chapter 7 bankruptcy, you cannot file for a Chapter 7 bankruptcy again for six years.
WHAT CHAPTER 7 BANKRUPTCY DOES
In Chapter 7 bankruptcy, you provide the court a list of all your debts and a list of everything you own. You also answer questions about your past financial dealings. You can claim as exempt the property you are allowed by law. This property you may keep. The trustee has the right to liquidate any property that cannot be claimed as exempt and then apply to cash to your debts.
The only restriction on keeping exempt property is that you still must pay purchase-money liens, the liens placed on property you buy. For example, if you plan to keep your car or house, you are still required to make the regular contractual payments to the creditor.
CHAPTER 7 BANKRUPTCY DOES NOT FREE YOU OF ALL DEBTS
Certain debts are not discharged in a Chapter 7 bankruptcy, which you still may have to pay some debts, even after you declare bankruptcy. These are:
- Debts not listed on your petition - If you don't list the debt, there is no opportunity afforded to the holder to dispute the case.
- Debts incurred through fraud. That is, you borrowed money and gave false information on a financial statement to the lending institution.
- Alimony and child support payments.
- Debts incurred when you willfully or maliciously injured someone.
- Non-compensatory (punitive) fines. Restitution ordered by a judge in a criminal case as well as traffic fines are examples.
- Certain educational loans
- Debts remaining from a prior bankruptcy
- Most types of taxes
- Consumer debts owed to a single creditor, that are more than $1000 for luxury goods or services, incurred within 60 days of filing the petition for bankruptcy
- Cash advances that are more than $1000 and that are extensions of consumer credit under an open-ended credit plan, obtained within 60 days before filing the petition. These exceptions are intended to prevent people from maxing out their credit cards just before they file bankruptcy
- Debts that arise from damages you caused as a result of operating a motor vehicles while legally intoxicated.
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