Bankruptcy laws serve two main purposes. First, bankruptcy law may give creditors some payment on their debts. Second, bankruptcy law gives you a fresh start by canceling many of your debts through an order of the court called a discharge.
What are the different kinds of bankruptcy?
There are two major types of bankruptcy available to individuals:
• Chapter 7 (a liquidation-style case for individuals or businesses);
• Chapter 13 (a payment plan or rehabilitation-style case for individuals with a regular source of income);
Both provide for some possible payments to creditors, a discharge for you and supervision by a trustee. Chapter 7 involves surrendering some of your property (at least in theory) in return for a discharge of many of your debts. The trustee sells any non-exempt property and pays your creditors. In chapter 13, you keep your property but must commit to a three- to five-year repayment plan. You then obtain a discharge of most of the debts not paid in the plan. In both types of bankruptcy, most creditors must stop efforts to collect debts after you file your case. This protection is called the “Automatic Stay.” In a chapter 7, this relief is often temporary since you must still pay for your secured property (usually a home and/or car) or the creditor may ask the court to remove the automatic stay.
What is the difference between chapter 7 and chapter 13?
Chapter 7: A Brief Overview
Chapter 7 is designed as a liquidation. Under this model, a trustee may sell certain property that you own at the time you file the bankruptcy case. The trustee uses the proceeds of the sale to pay creditors. However, the sale of assets in a typical chapter 7 case is unusual. In most cases, you will not have any assets over and above what the law allows you to keep. Thus, in most chapter 7 cases, you do not have any property that the trustee may sell. About 90 days after you file chapter 7, most of your debts will be discharged, if yours is the typical case. This means you are no longer liable to pay the debt. Some debts are not discharged, however, and you still must pay them.
Examples include past-due child support payments, some taxes and student loans. Debts for which you have pledged collateral for the loan (such as cars, homes and household goods) also do not go away in a bankruptcy. The bankruptcy case addresses only the debts you list at the time of the bankruptcy case. You must pay debts you incur after the filing the bankruptcy case as usual. You may keep the money that you earn after filing a chapter 7 bankruptcy case, as well as most other property that you obtain after the filing.
Chapter 13: A Brief Overview
Chapter 13 is very different. If you file under chapter 13, you may keep your property and you agree to pay your debts over time from your current income, pursuant to a court-approved plan. The amount that you will repay to creditors under the plan will vary based on your particular circumstances. The payments made to creditors under the plan must total at least as much as creditors would have received if you filed a case under chapter 7. The payments are made to a trustee, who distributes the payments to the creditors. The plan lasts either until you pay your debts in full or until the end of a three- to five-year period. You receive a discharge at the completion of the plan.
Do I have to “qualify” for bankruptcy? How will I know if I am eligible?
Chapter 7 Eligibility
After October 17, 2005, access to chapter 7 is more limited than it was in the past. If you are an individual with primarily consumer debts and you want to file a case under chapter 7, you will have your finances examined to determine if you can afford to pay creditors. If you can, based on a set formula known as the “means test,” you will not be eligible to file a chapter 7. So, the court will either dismiss your bankruptcy case, or you may choose to convert your case to chapter 13.
The means test compares your excess monthly income to the amount of unsecured debt to determine how much you could repay to creditors if you were in a chapter 13. Because this calculation is hypothetical and does not necessarily reflect your true financial condition, you may appear to be able to repay the minimum portion of your debts but you, in reality, cannot. In that situation, the court may permit you to stay in chapter 7. Unfortunately, the means test is quite complicated and it is wise to seek professional assistance when choosing the chapter under which to file.
Chapter 13 Eligibility
There are two principal requirements for eligibility in a chapter 13 case. First, you must have regular income, although this need not be from a job; regular benefit payments or rental income would qualify. Second, you must not have debts over a certain amount. The debt limits are $1,010,650 in secured debt (like home mortgages and auto loans), and $336,900 in unsecured debt (like most credit card debt). These numbers go up periodically.
How does bankruptcy help me in the short run?
The filing of bankruptcy automatically imposes an injunction against all collection efforts by creditors, which means creditors must stop calling, sending letters or suing you over your debts. This is called the automatic stay, discussed in more detail below.
What is a discharge?
If a debt is discharged, you no longer have an obligation to pay the debt, and the creditor may not make any effort to compel you to repay. However, if some other person (such as a relative or friend) also has an obligation to pay, his/her obligation is not discharged. In addition, if you have property that is collateral for a loan, the creditor may still be able to repossess that collateral.
Do all debts get discharged?
No, not all debts will be discharged through the bankruptcy, even if you have satisfactorily performed all your duties in your case. First, a bankruptcy case only discharges debts that you owed and scheduled at the time you filed the case, not those you incurred after filing the case.
Debts that are not discharged include debts for certain taxes, certain unscheduled debts (creditors with debts not listed in your paperwork), alimony, maintenance or support debts, pre-petition fines or restitution, debts for injury or death caused by use of drugs or alcohol, most student loans and certain condo or co-op fees.
Other debts that may not be discharged include debts you may have incurred through fraud or by willful or malicious actions. If the creditor does not ask the court to rule on these debts, they will be discharged.
How much does it cost to file bankruptcy?
The current filing fee for a chapter 7 case is $306 and for a chapter 13 case is $281. Some courts also impose an additional administrative fee. You may pay the filing fee in installments. The court may waive the filing fee in a chapter 7 case if your income is below specified levels and the court finds that you cannot pay the filing fee in installments.
You will probably find it necessary to hire an attorney to assist you with filing bankruptcy. Attorneys usually charge a fixed fee for certain services in a bankruptcy case and the fees typically differ depending on the chapter under which you file.