An individual who is badly in debt can file for bankruptcy either under one of several Chapters of the Bankruptcy Code: Chapter 7, called “Liquidation” or “Straight Bankruptcy”; Chapter 11, or “Business”; Chapter 12, called “Family Farm Reorganization”; and Chapter 13, called “Reorganization”. This article is reserved for the 2 most common types of individual bankruptcy: Chapters 7 and 13.
Chapter 7 involves the sale of all a debtor’s nonexempt property, payment of creditors with the sale of those proceeds, discharge of some/all debts, and the debtor’s retention of exempt property. In Chapter 7, the debtor is chiefly interested in keeping his/her exempt property while receiving the discharge of as many debts as possible and receiving a “fresh start”. “Exempt property” is determined by the Bankruptcy Code and state law, allowing the debtor to keep certain types of property from unsecured creditors, and may include such real/personal property as the debtor’s primary residence (or “homestead”) and some/all “tools of the trade” that the debtor uses to make a living (such as carpentry tools for a carpenter or mechanical tools for a mechanic). An “unsecured creditor” is a creditor having no special assurance – such as a mortgage or lien – that a debt will be repaid. Typically, unsecured debts are discharged after little or no payment toward the debt. In contrast, a “secured creditor” has an assurance – such as a mortgage or lien – that a debt will be paid and can hold or sell certain property belonging to the debtor in order to satisfy some/all of the debt. Depending on the circumstances, a debtor may “reaffirm” a debt – agree to continue paying the debt – for secured property (for example, a car with a debt secured by car loan/lien) in order to retain the car. The “discharge” is a release of the debtor from personal liability for a debt, legally preventing any further action from creditors to communicate with this debtor and/or collect the debt from this debtor. Again, the Bankruptcy Code and state law determines which debts are dischargeable. Some debts are not dischargeable and the debtor remains personally liable for them despite Bankruptcy. These nondischargeable debts include but are not limited to: a mortgage on the debtor’s home; debts for child support; debts for spousal support; some types of taxes; debts for government funded loans; debts for business loans; debts for guaranteed educational loans; debts from death/personal injury caused by driving while intoxicated or driving under the influence of drugs; and debts for restitution or a criminal fine. Some other debts can be made nondischargeable by a creditor’s successful nondischargeability action regarding debts for money/property obtained by false pretenses, debts for fraud or debts for misappropriation of money/property by a fiduciary. A debtor can receive a discharge under Chapter 7 once every 8 years.
Chapter 13 Bankruptcy usually involves an individual with greater “means.” In a Chapter 13 Bankruptcy, the debtor is allowed to set up a repayment plan in order to pay creditors and keep large assets, such as a house and a car. Repayment plans usually allow 3 – 5 years for repayment of creditors. Chapter 13 Bankruptcy offers several advantages over Chapter 7 Bankruptcy: it allows the debtor to save his/her home from foreclosure; it allows a debtor to reschedule other secured debts, extending them over the life of the repayment plan and possibly lower each payment as a result; it may protect third parties – such as cosigners – who share liability with the debtor for “consumer debts”; the repayment plan acts like a consolidation loan, allowing the debtor to make payments to the trustee and have no contact with creditors. Here, “discharge” means that you have made your final payment and completed your payment plan, so the bankruptcy trustee will give you notice of discharge 30 – 60 days after the final payment is made. Petitions in Chapter 13 Bankruptcy may be filed at any time.
[Note from HandelontheLaw.com: This article is to be used as an educational guide only and should not be interpreted as a legal consultation. Readers of this article are advised to seek an attorney if a legal consultation is needed. Laws may vary by state and are subject to change, thus the accuracy of this information cannot be guaranteed. Readers act on this information solely at their own risk. Neither HandelontheLaw.com, or any of its affiliates, shall have any liability stemming from this article.]
Note from HandelontheLaw.com: This article is to be used as an educational guide only and should not be interpreted as a legal consultation. Readers of this article are advised to seek an attorney if a legal consultation is needed. Laws may vary by state and are subject to change, thus the accuracy of this information can not be guaranteed. Readers act on this information solely at their own risk. Neither the author, handelonthelaw.com, or any of its affiliates shall have any liability stemming from this article.