Bankruptcy Chapters 7, 11 and 13 Explained
Bankruptcy Chapter 7
Get protection from your creditors when you file for bankruptcy.
The first step is filing a bankruptcy petition in court. This document will ask you to list personal information, including all of your income, your assets, your expenses and your debts. You must also indicate applicable exemptions to which you're entitled. Exemptions are laws that prevent your creditors from taking property away from you.
Then you file a petition in your local bankruptcy court. When this occurs, the court appoints a bankruptcy trustee to your case and an "Automatic Stay" is entered, a court order that prohibits most of your creditors from taking any further action against you outside of bankruptcy court. This action is designed to:
—Stop most calls and bills from creditors
—Protect much of your property from seizure
—Prohibit most creditor lawsuits against you
—Prevent foreclosure of your home
—Stop wage garnishments
—Block the repossession of your automobile
You must comply with all of the rules before you receive your discharge.
—It is important that you follow all of the rules and refrain from:
—Attempting to conceal your property
—Destroying financial records
—Violating a court order
—Making enormous, last-minute charges on your credit cards
—Also note that you can only file for Chapter 7 once in eight years.
Chapter 7's exemptions allow you to protect your property from creditors.
The beauty of Chapter 7 bankruptcy is that certain types of your property are untouchable by creditors. Exemptions vary by state but typically include:
—Your primary residence
—Certain items of personal property
—Tools
—Work equipment
—Your vehicle
—Numerous other categories of property
More often than not, your exemptions will protect all of your assets. If not, your court-appointed trustee will ask to begin liquidation proceedings to pay your creditors. In most cases, however, the trustee will only liquidate if he/she can obtain enough money from a sale to make a significant payment to your creditors. If creditors are paid or a settlement reached, your debts are permanently wiped out.
Bankruptcy can help you eliminate many debts.
If a debt is unsecured-that is, with no collateral backing it up-it typically can be discharged in a Chapter 7 bankruptcy. Some of these include:
—Credit card debt
—Medical bills
—Most personal loans
—Judgments resulting from car accidents
—Deficiencies on repossessed vehicles
—Some older tax debts
—Payday loans
—Garnishments
—Bounced checks
Retain your assets by reaffirming your debts.
You can eliminate unsecured debts in bankruptcy, but secured debts don't go away. Your creditors will hold a lien against your property until the debt is paid.
When you file bankruptcy, however, you may be able to negotiate a reaffirmation agreement with your creditors in which you agree to continue making payments in exchange for your right to keep the property. The United States Bankruptcy Code also has provisions that can reduce the outstanding balance on your loans.
A bankruptcy can not eliminate all debt.
Unfortunately, even a bankruptcy cannot eradicate everything you owe. You will still be liable for:
—Child support
—Taxes
—Student loans
In the case of significant non-dischargeable debts, you might consider a Chapter 13 filing. Of course, if you initially file under Chapter 7, but you don't satisfy the requirements, your case can be converted to a Chapter 13, and you will be compelled to file a debt repayment plan and potentially lose the ability to wipe out a large potion of your unsecured debts.
The last step.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 imposes one last hurdle before you're eligible for your discharge-the financial education requirement. This requires you to complete an instructional course concerning personal financial management.
Bankruptcy Chapter 13
If you are suffering under a mountain of debt and expenses that you just can't keep up with, but you do have a job or some other source of regular income that you can use to make payments under a repayment plan, a Chapter 13 bankruptcy may be right for you. You can use Chapter 13 to liquidate many of your debts, set up a reasonable debt repayment plan, and get a fresh financial start. The following is an overview of the Chapter 13 process.
Your Chapter 13 case begins with filing your petition.
A Chapter 13 case begins with the preparation and filing of your bankruptcy petition-which involves some of the same forms you would file in a Chapter 7 case. In your petition, you are required to list certain personal information about yourself, your spouse, and your family, and you must set forth all of your income, your property (assets), your expenses, and all debts (liabilities). Additionally, you must select the specific exemptions to which you are entitled (exemptions are the laws that prevent your creditors from taking your property away from you).
Additionally, as a result of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, before your bankruptcy petition can be filed, you must receive a briefing from an approved credit counseling agency explaining opportunities available for you to receive credit counseling as well as helping you to do a budget analysis. Although there are some hardship exceptions to this rule, most debtors will have to undergo the counseling.
Shortly after you file your petition, the bankruptcy court clerk will send a notice of your bankruptcy case to all of the creditors listed in your petition. After that, your case will be assigned to a bankruptcy trustee, who will review your case. The bankruptcy court will also issue an Automatic Stay order. This order prohibits most of your creditors from collecting their debts from you, from repossessing your car or other property, and from starting or continuing any legal actions against you.
Your repayment plan is the centerpiece of your Chapter 13 petition.
Your repayment plan is an agreement between you and your creditors in which your creditors agree to forgive a portion of your debts to them in exchange for your commitment to repay your reduced debts over time. Most plans require you to make monthly payments to the bankruptcy trustee-a federal official who is appointed by the court to oversee your case-who in turn makes distributions to your creditors. Typically, your repayment plan will last from three to five years. While you are making payments under a repayment plan, the creditors listed in your plan cannot take any collection actions against you, and they are required by law to abide by the terms of your repayment plan.
Before your discharge is approved, you must receive debt counseling services.
Another requirement established Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 is the financial education requirement. This requires you to complete an instructional course concerning personal financial management (this requirement is often waived).
Not all debtors qualify for Chapter 13.
A Chapter 13 bankruptcy is not for everyone. You may qualify for a Chapter 13 bankruptcy only if you can satisfy the following three requirements:
You must have a regular source of income. Because you must be able to meet the terms of your repayment plan, the Bankruptcy Code requires that your income be "stable and regular" if you wish to file a Chapter 13.
You must have enough disposable income. The law requires you not only to have a "regular" source of income, but also to have sufficient "disposable income." In other words, you must have income left over after your expenses for basic human needs each month to allow you to make your monthly payments in a timely fashion under your repayment plan. There is no set formula for determining how much income is enough, and the courts are flexible in determining this. Courts will often require you to submit a proposed budget to see if you can satisfy these requirements
Your debts must not be too high. If your secured debts (which include loans you have secured by liens on your property, such as your home and auto loans, and even IRS tax liens) exceed $922,975, you are not eligible for a Chapter 13 bankruptcy. Also, your unsecured debts may not exceed $307,675 (unsecured debts are debts for which you have not pledged any of your property as collateral-such as most credit card debt, personal loans, and utility bills.
If you don't qualify for a Chapter 13 bankruptcy, don't worry; you'll probably be able to qualify for a Chapter 7 .
The benefits of Chapter 13.
A Chapter 13 case will be better for you than a Chapter 7 in the following circumstances:
You are behind in your payments for property that you want to keep after bankruptcy. For example, if you are late on your mortgage or automobile loan, and you want to get current with these payments and keep your property, you can do this under a Chapter 13 plan.
You have tax debts . It is very difficult to discharge your tax debts in a Chapter 7 plan. Furthermore, even if you are able to discharge some tax debts through Chapter 7, if the IRS has any recorded tax liens against you, these liens will survive your bankruptcy and still be on your record, and the IRS can seize any property you owned at the time you filed bankruptcy. Accordingly, if a large percentage of your debt involves unpaid federal taxes, and you have the ability to repay them over time, a Chapter 13 may be a better alternative for you than a Chapter 7.
If you have nonexempt property you want to keep. If you have a lot of nonexempt property-property which you would have to give up to your creditors were you to file a Chapter 7-Chapter 13 may allow you to keep this property.
If you have received a Chapter 7 discharge within the previous six years. You cannot file another Chapter 7 for eight years.
To protect cosigners on your debts. If you had your spouse or parent cosign on an auto or other personal loan for you prior to your bankruptcy, a Chapter 7 won't protect your cosigner, and your creditor could go after your family member for the full amount of your debt. If, instead, you file under Chapter 13, your cosigner will be fully protected from your creditors as long as you make your payments under your repayment plan.
Consolidate your student loans. Although you can't discharge your student loans in a Chapter 7 bankruptcy, you can include them in your Chapter 13 repayment plan and repay them over time.
It's your time to get a fresh start under Chapter 13
A Chapter 13 case will be better for you than a Chapter 7 in the following circumstances:
You are behind in your payments for property that you want to keep after bankruptcy. For example, if you are late on your mortgage or automobile loan, and you want to get current with these payments and keep your property, you can do this under a Chapter 13 plan.
You have tax debts . It is very difficult to discharge your tax debts in a Chapter 7 plan. Furthermore, even if you are able to discharge some tax debts through Chapter 7, if the IRS has any recorded tax liens against you, these liens will survive your bankruptcy and still be on your record, and the IRS can seize any property you owned at the time you filed bankruptcy. Accordingly, if a large percentage of your debt involves unpaid federal taxes, and you have the ability to repay them over time, a Chapter 13 may be a better alternative for you than a Chapter 7.
If you have nonexempt property you want to keep. If you have a lot of nonexempt property-property which you would have to give up to your creditors were you to file a Chapter 7-Chapter 13 may allow you to keep this property.
If you have received a Chapter 7 discharge within the previous six years. You cannot file another Chapter 7 for eight years.
To protect cosigners on your debts. If you had your spouse or parent cosign on an auto or other personal loan for you prior to your bankruptcy, a Chapter 7 won't protect your cosigner, and your creditor could go after your family member for the full amount of your debt. If, instead, you file under Chapter 13, your cosigner will be fully protected from your creditors as long as you make your payments under your repayment plan.
Consolidate your student loans. Although you can't discharge your student loans in a Chapter 7 bankruptcy, you can include them in your Chapter 13 repayment plan and repay them over time.
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