There are actually several different Chapters of the Bankruptcy Code, but the two Chapters most frequently used by individual Debtors (as opposed to business Debtors) are either Chapter 7 or Chapter 13.
A Chapter 7 is referred to as a “fresh start” or a “clean slate bankruptcy.” This is liquidation bankruptcy. In a Chapter 7, the trustee can sell any of the Debtor(s)’ assets (“liquidate”) which are over allowed exemption amounts, in order to pay off a portion of the Debtor(s)’ unsecured debt. Normally, assets do not get liquidated in a Chapter 7, but your attorney can explain more about this process after reviewing your asset situation. A Chapter 7 typically has a very short duration, with most bankruptcies only last approximately three (3) months from start to finish. As such, it is usually the cheaper and the faster of the two Chapters.
A Chapter 13 is a wage earner Plan, so you must be employed or have some other regular source of income. Individuals who have less than $307,675 in unsecured debt and less than $922,975 in secured debt may file under this Chapter. A plan is proposed to repay some or all of the debt. A trustee oversees administration of the plan. Debts are prioritized as either priority debts, secured debts, or unsecured debts. As such, most plans are often not a complete repayment of the Debtor(s) debts, and whatever debt is leftover at the end of the successful completion of the Plan is discharged by the court. Generally the plan must provide for payment of secured creditors in full or according to the terms of the contract if the security is retained (e.g., home loans and vehicles). However, some secured creditors may have their claims modified. The plan must also pay all administrative and priority creditors in full. Unsecured creditors are entitled to receive as much as they would receive under Chapter 7, or how much you can afford to pay them over the life of the plan, whichever is greater. The Plan is usually paid in installments over the course of 3 – 5 years.
Why would anyone choose a Chapter 13 over a Chapter 7?
Some Debtors are not eligible to file a Chapter 7, because their income is too high to pass the Means Test, which is based upon the Debtor’s household size and geographic region.
Additionally, if the Debtor is behind on a secured debt and they want to keep the property securing the debt, we cannot do so in a Chapter 7. Thus, houses that are in foreclosure or behind on payments, or vehicles that are threatening repossession (or even ones that have been repossessed recently but not yet sold), can be saved in a Chapter 13.
There can be advantages to a Chapter 13 over a Chapter 7, such as the elimination of accruing interest, preventing foreclosure or repossession, and the possibility of reducing principal and/or interest on certain financed vehicles, which can be discussed with your attorney. A Chapter 13 may also be a good option for Debtors fighting tax liens and IRS collection actions, as an affordable repayment plan can be entered into, with the possibility of even be able to discharge tax debts older than 3 years.
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