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There are two primary types of personal bankruptcy: Chapter 7 and Chapter 13. Chapter 7 is called liquidation and it is the most common. Chapter 13 allows debtors to keep property, such as a house or car. In Chapter 13, the court approves a repayment plan with a default date. Bankruptcy can erase debt and stop foreclosure, repossessions, and other debt collections. Bankruptcy usually doesn't erase child support, taxes, alimony, fines and some student loans.
When a creditor files suit and obtains a judgment against an individual, that creditor has the right to collect the debt by executing or attaching on the debtor's assets. Common forms of judgment execution are wage garnishment, bank account garnishment, levies on personal property and liens. Generally, certain property may be exempt from execution. If property is exempt from execution, the judgment creditor is not allowed to seize, attach or in any way interfere with the rights of the debtor to that exempt property. Those exemptions also apply in bankruptcy. Pursuant to the U. S. Bankruptcy Code, U. S. Bankruptcy Courts must choose whether to use the exemptions allowed under federal statute or elect to use the exemptions allowed by the state where the U. S. Bankruptcy Court sits. Certain states have "opted out" of the federal exemption statutes and therefore use the exemptions allowed under state law.
Chapter 7 bankruptcy is commonly referred to as Chapter 7 liquidation because any unencumbered property or property with non-exempt equity is sold or "liquidated" by the Chapter 7 trustee for distribution to the debtor's unsecured creditors. Chapter 7 bankruptcy allows a debtor to have his or her unsecured debts discharged if the debtor meets certain requirements. However, some debts are normally not dischargeable, such as tax debt, support obligations and guaranteed student loans. You should contact an attorney to discuss which debts are dischargeable in bankruptcy and which debts are not. Other than those debts reaffirmed by the debtor or those debts found by the bankruptcy court to be non-dischargeable, the Chapter 7 debtor will receive a discharge of all personal liability for those debts.
The Chapter 7 trustee is appointed by the Office of United States Trustee. The Chapter 7 trustee's duty is to make sure that the debtor is complying with the rules of the bankruptcy court and to determine whether any non-exempt assets exist that could be taken by the trustee, sold and used to pay the debtor's creditors.
In order to qualify for relief under Chapter 7 of the U. S. Bankruptcy Code, the debtor must have little or no disposable income. Disposable income is defined as a person's net income minus his or her reasonable and necessary expenses. Typical expenses considered to be reasonable and necessary are the debtor's expense for the following:
- Housing, such as rent or house payments
- Car payments
- Expenses for food
- Utilities
- Insurance
- Transportation expenses
If it appears that the debtor has little or no disposable income, then the debtor may proceed pursuant to Chapter 7 of the bankruptcy code.
In a Chapter 7 case, debtors may want to "reaffirm" certain debts. To reaffirm a debt normally means that the debtor intends to pay a specific debt back to a creditor under the terms of the original agreement. This is typically done on secured debts such as home mortgages and automobile loans where the debtor wants to retain that piece of secured property. These debts are normally not modified and reaffirmation of the debt will cause the debt to survive bankruptcy and the reaffirmed debt will not be discharged upon the completion of the Chapter 7 case. A debtor is not required to reaffirm any debt in the bankruptcy; however, if the debtor does not reaffirm a debt secured by a piece of property, the property securing the debt must be surrendered to the creditor pursuant to the security agreement with the creditor.
Once the Chapter 7 debtor files his or her case with the bankruptcy court, what is known as the automatic stay goes into effect. The automatic stay prohibits any creditor from taking any action outside the bankruptcy court to collect any debt. Therefore, creditors may no longer send letters or statements, make telephone calls, proceed with lawsuits, repossess vehicles, or garnish or attach on any assets of the debtor once the automatic stay goes into effect. The automatic stay goes into effect immediately upon filing of the debtor's bankruptcy petition. The automatic stay will remain in effect until the close of the bankruptcy case unless a creditor files a motion with the court to lift the stay and is able to show good cause to have the stay lifted.
Approximately 30 days after the Chapter 7 case is filed, what is known as the Section 341 meeting of creditors is held, presided over by the Chapter 7 bankruptcy trustee. The Chapter 7 bankruptcy trustee is appointed by the office of the U. S. Trustee for the district in which the debtor filed his or her Chapter 7 bankruptcy. The Chapter 7 trustee will conduct the 341 meeting of creditors. At that time, the individual debtors will be placed under oath and questioned regarding their income, assets, and debts. Any creditor wishing to ask specific questions of the debtor also has the right to appear and inquire of the debtor. If there are no objections to discharge by the trustee or creditors, the Chapter 7 debtor will normally be granted a discharge approximately 60 days after the conclusion of the Section 341 meeting of creditors.
In the majority of Chapter 7 cases there are no assets available for what are sometimes known as “no asset cases.” In no asset Chapter 7 cases, the trustee has determined, based upon the value of the debtor's assets and the exemptions claimed under the applicable state law, that there are no non-exempt assets that can be taken by the trustee and sold to distribute to the debtor's creditors. In Chapter 7 cases where non-exempt assets exist, the trustee must either seize those assets and sell them, or require the debtor to pay the value of those assets to the trustee. The proceeds will then be distributed to the debtor's creditors on a pro rata basis.
Clients will normally make an appointment and come in to meet with an attorney within a few days of the initial phone call. After the initial meeting, a petition and schedules will normally be ready for filing within 10 days to two weeks. In situations where a garnishment or foreclosure is pending or imminent, preparation and filing will be expedited to meet the client's needs. Filing the Chapter 7 case causes the automatic stay to take effect, stopping debt collection. Approximately 30 days after filing, the 341 meeting of creditors will be held presided over by the Chapter 7 trustee. Most cases conclude, absent objections to discharge, with the Court granting a discharge order approximately 60 days after the 341 meeting.
As an alternative to Chapter 7, debtors may elect to file under Chapter 13 of the U. S. Bankruptcy Code. Chapter 13 bankruptcy is normally appropriate for debtors who have regular income, some of which is disposable. Disposable income is net income minus reasonable and necessary living expenses. Chapter 13 allows a debtor to restructure his or her debts by submitting a plan with the bankruptcy court and agreeing to pay the debtor's disposable income to the bankruptcy trustee over a period of 36-60 months. During a Chapter 13 case, the debtor must pay all of his or her disposable income to the Chapter 13 trustee on a monthly basis for at least 36 months, unless the debtor intends to pay all of his or her creditors back in full. At the end of the plan period, any debt that has not been paid back through the Chapter 13 trustee will be discharged much as in a Chapter 7 bankruptcy. Chapter 13 cases must run 36 months in order for the debtor to receive a discharge of dischargeable unsecured debts. A Chapter 13 plan will normally only be allowed to run less than 36 months if the debtor is able to pay his or her debts back in full during the life of the Chapter 13 plan in what is known as a "100% plan".
There are a number of advantages to a Chapter 13 case over a Chapter 7 for the individual debtor. In a Chapter 13 case, while a residential home mortgage normally may not be modified, a debtor in arrears on his or her mortgage payment is allowed to pay that arrearage back through the Chapter 13 plan. This is true as long as the debtor is able to begin making the normal mortgage payment once the debtor's case is filed. In addition, in a Chapter 13 case, certain secured loans such as loans on automobiles are allowed to be paid back based upon the fair market value of the secured property and at the trustee's interest rate as adopted by local rule.
As always, if you did not find the answer to your question here, feel free to
.