Types of Bankruptcy

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is commonly referred to as a “straight bankruptcy” or a “Liquidation Chapter,” and is often what people mean or think of when they hear of bankruptcy. In its simplest form, Chapter 7 wipes out most of your debts and, in turn, in rare cases, you may have to surrender some of your property. Chapter 7 does not include a repayment plan. Your debts are simply eliminated forever.

Theoretically, a debtor’s assets can be seized and sold for the benefit of creditors. All nonexempt assets owned as of the petition date are fair game. But in practice, 96 percent of the consumer bankruptcies are no-asset cases, meaning that no property is taken away from the debtor because it’s all exempt (protected under the bankruptcy code) or worth so little it’s not worth the trouble. Certain debts, e.g. back child support, recent taxes, are not dischargeable in any bankruptcy.

Bottom line: most debtors can discharge most of the their debt while keeping most of their property.

Chapter 7 Process

The entire process starts after extensive information gathering is completed. A document called a Bankruptcy Petition is completed containing detailed information relating to the debtor’s income, assets and debts. The debtor eventually reviews & approves of his or her petition by signing it, and immediately thereafter it is electronically filed by the debtor’s attorney.

In the Chapter 7 process, a trustee is designated by the bankruptcy court to review the assets of the debtor. The trustee determines which assets are exempt or nonexempt property. Exemption of property is restricted to debtor equity in a possession such as a car, home, or life insurance.

Once Chapter 7 bankruptcy protection has been filed by a debtor, all creditor collection activities must cease immediately. This includes harassing collection letters, phone calls, garnished wages and repossessions.

The process requires the debtor to provide documentation of the value of all assets as well as a list of all creditors, income and expenses. This documentation must be completed prior to filing. The required documentation includes the following items:

  • Pay stubs for the debtor and all household members for the previous six months
  • Copies of all bills and notices
  • Credit report
  • Valuation of all assets
  • Any Child Support orders
  • Federal Tax returns for the three years prior to the filing
  • Also prior to the filing, the debtor must undergo credit counseling and receive a completion certificate from an approved credit counselor. This certification must be filed with the court, with the bankruptcy petition.
Credit Counseling
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The 341(a) Creditors Meeting
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Chapter 13 Bankruptcy

Chapter 13 Bankruptcy is the reorganization chapter of the bankruptcy code typically used for the individual consumer. To be eligible for a Chapter 13 Bankruptcy the individual must have some sort of income and must not exceed debt limits of $1,257,850 in secured debt and $419,275 in unsecured debt. It is also known as the non-liquidation bankruptcy because the Trustee does not sell the Debtor’s assets for the benefit of the creditors.

However, over the life of the plan, the Debtor will have to pay back some amount of money to some of his or her creditors. The amount paid is typically equal to the amount the creditors would have received had the Debtor filed a Chapter 7 bankruptcy. This is known as liquidation analysis.

Who is it for?

A Chapter 13 bankruptcy is very useful for people who:

  • Are behind in their mortgage or rent payments;
  • Have certain taxes or similar type of debts that can’t be discharged in Chapter 7;
  • Are behind in their car payments or have an interest rate and/or payment that is too high;
  • Have a suspended drivers license due to insurance surcharges;
  • Have assets that cannot be protected in a Chapter 7 Bankruptcy.
Chapter 13 Process
Credit Counseling
The 341(a) Creditors Meeting
The Confirmation Hearing
Personal Financial Management Course
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