Initially, deciding which type of bankruptcy to file for may seem confusing. Let’s see what we can do to simplify it for you. There are four basic kinds, or “Chapters”, of bankruptcy: Chapter 7, Chapter 13, Chapter 11, and Chapter 12. Since Chapters 11 and 12 pertain to corporations or farmers, the average person only needs to understand Chapters 7 and 13.
Chapter 7 is also known as “liquidation” or “straight bankruptcy.” Most consumer bankruptcies are called “No Asset”, since all or most of the assets either have little monetary value or are exempt under federal or state law. Almost all consumers filing Chapter 7 keep all of their assets and discharge all or most of their unsecured debt.
Since 2005, there has been a greater focus on income and expenses. Under the “means tests”, consumers with substantial disposable incomes may have to pay back a portion of their debt.
Chapter 13 is also known as an Individual Debt Adjustment. The basic difference between Chapter 7 and Chapter 13 is pretty simple. In Chapter 13, debtor’s income is sufficiently large enough to facilitate a “reorganization” or repayment plan. The advantage of Chapter 13 is that it allows the debtor to pay to unsecured creditors only what he or she can afford to pay. Further, no negotiation is required, and no interest is charged on the outstanding debt. The balance due on each debt is fixed when the filing is complete.
Homeowner Mortgage Debt
Another advantage of Chapter 13 is that it allows homeowners to “catch up” or repay mortgage payments in arrears over the life of the plan. Generally, mortgage companies will only allow a very short repayment period of 4 – 6 months, so the 60-month Chapter 13 plan is an invaluable tool to allow homeowners to keep their home and prevent foreclosure. The bankruptcy court also also has a mortgage modification program to assist homeowners.
Last but certainly not least, Chapter 13 allows the consumer a chance to repay tax debt that is not dischargeable under Chapter 7. Chapter 7 will discharge income tax debt that was more than 3 years old, if the tax returns were filed more than 2 years prior to filing bankruptcy.
In general, if you are struggling with debt and can see no easy way out, please contact an experienced, competent bankruptcy attorney, preferably with an initial free consultation. Bankruptcy law is complex, requires that deadlines be followed, and is not practically do-able by the average person. Your attorney can help you sort out the issues, select a Chapter type, and help you move through the process as painlessly as possible.