When someone goes to a bankruptcy law firm and asks for advice, it is often quite surprising to hear them say, “I’m not sure which Chapter I qualify for?” or “Will my debts be wiped out?” or “Do I have to disclose assets?”. In response to these often asked questions, this article will discuss the types of bankruptcies.
Bankruptcy starts with the filing of a petition in the bankruptcy court. This post will be focusing on two of the most common types of bankruptcies – Chapter 7 and Chapter 13. However, if I file for bankruptcy, what will happen? Let’s start this post by answering that question.
What Happens If I file?
To file for bankruptcy, you must go to federal court. Once your bankruptcy case is filed, your creditors must quit chasing your debts. The court will then ask for information such as:
- Total debt owed
- A list of all your debtors
- A complete income statement
- A breakdown of your outgoing expenses
- A breakdown of your outgoing expenses
In bankruptcy court, you can represent yourself. You can also engage a bankruptcy lawyer to represent you and guide you through the lengthy process of declaring bankruptcy. Debt discharge or reorganization in bankruptcy court might take a long time. If you hire a lawyer, they can explain the timeframe in your bankruptcy case.
Chapter 7 and Chapter 13 Bankruptcies
Chapters 7 and 13 are bankruptcy chapters within the United States Bankruptcy Code. They are intended to help people who have become unable to pay their debts. Some people believe that Chapter 7 and 13 bankruptcy cases are the same thing. They are not the same. They have different rules and procedures.
The primary distinction between Chapters 7 and 13 bankruptcy is that you lose your property under a Chapter 7 bankruptcy, and it becomes property of the bankruptcy court. Under a Chapter 13 bankruptcy, you do not lose your property, but that property must be paid to your creditors in installments over three to five years.
What Type of Bankruptcy Is Chapter 7?
Bankruptcy Chapter 7 can sometimes refer to as liquidation bankruptcy because all of your assets are liquidated or sold to pay off as much of your debt as possible.
In some conditions, it is possible for a person filing for Chapter 7 bankruptcy to keep some types of property by paying the value of that asset into the Chapter 7 estate before any distribution takes place.
The following consist of the types of debts that are generally discharged in a Chapter 7 bankruptcy:
- Medical bills
- Credit card statements
- Bills for utilities
- Loans to individuals
- Certain governmental legislation
How Do I Meet the Criteria for Chapter 7?
You may apply for Chapter 7 bankruptcy without an attorney, but you should strongly consider hiring one. There is a great deal at risk, and the process may get rather complicated. Chapter 7 typically takes four to six months to complete.
The following are the usual criteria for Chapter 7 bankruptcy eligibility:
- You must pass a “means test,” in which your income, assets, and spending are examined.
- Any Chapter 7 or Chapter 13 bankruptcy petition filed in the last 180 days must have been dismissed.
- In the past eight years or six years, you have not filed a Chapter 7 or Chapter 13.
What Are the Benefits of Chapter 7 Bankruptcy?
- Major Financial Help
The main advantage of Chapter 7 bankruptcy is the elimination of all unsecured obligations, such as utility, medical, and credit card payments, and personal loans. The best thing is that debt relief is unlimited, meaning bankruptcy can dismiss hundreds of thousands of dollars due.
A lender can’t seize or foreclose on your property during a Chapter 7 bankruptcy. This temporary option allows you to catch up on payments or find an alternative.
- Debt Collector Protection
The automatic stay protects you against creditors who may have previously harassed you for
debt collection. If you entirely discharge a debt, you have permanent protection. On the contrary, you may obtain a partial discharge and a time extension.
- Garnishment of Wages
If you file for bankruptcy, no creditor may garnish your wages. This money can be used to cover monthly expenses.
Chapter 7 permits you to keep assets like a home, a car, clothing, furniture, etc. To live comfortably, you can maintain other assets worth less than a specific amount (typically $10,000 or less).
- Fresh Start in Months
It takes 3-6 months for Chapter 7 to work and you will get your fresh start. As opposed to a Chapter 13, where you need to finish a 5-year debt repayment plan.
What are the Disadvantages of Chapter 7 Bankruptcy?
- Chapter 7 is not available to individuals or businesses who earn more than a certain amount.
Your bankruptcy will be amended to Chapter 13, which includes either partial or complete debt relief.
- Bad Credit
Credit scores will drop regardless of bankruptcy type and will be on record for 7-10 years. You may still get fresh credit or loans if you qualify.
- Asset Disposal
Non-exempt assets, such as expensive autos, real estate, and collectibles will be liquidated to satisfy creditors.
- Harmful Publicity
When you declare bankruptcy, your financial situation is made public. Anyone can look up the bankruptcy, but few do.
- Debts not dischargeable
Mortgages, student loans, and auto loans are not dischargeable under Chapter 7. Also, bankruptcy does not relieve financial obligations like child support, alimony, and taxes.
What Type of Bankruptcy Is Chapter 13?
Chapter 13 is sometimes called reorganization bankruptcy because, under this type of bankruptcy, you may be able to keep certain assets by agreeing to make regular payments on them for three to five years. If you cannot make these payments, then the property may be sold or liquidated to satisfy any remaining liabilities.
You’ll need the help of a competent bankruptcy attorney when preparing and submitting this type of petition with the court. An attorney can help determine whether Chapter 13 is right for you.
How Do I Meet the Criteria for Chapter 13?
To be eligible for Chapter 13 relief, a debtor must meet the following criteria:
- The debtor may be an individual or a married couple. Corporations, limited liability companies, partnerships, and business trusts are not eligible for Chapter 13 relief.
- The debtor must have “regular income,” which encompasses job revenue (i.e., working for a pay check), business income, renting income, and government help or benefits.
- Monthly net income must exceed monthly cost of living, leaving money each month to pay the Chapter 13 Trustee.
- Secured debt, which includes mortgages, tax liens, and auto loans, cannot exceed $1,149,525.00, while unsecured debt, including credit cards and medical bills, cannot exceed $383,175.00. These figures are revised every three years.
What are the Benefits of Chapter 13 Bankruptcy?
- Maintain ownership of all property – As long as you comply with the terms of your repayment plan.
- While debt is not eliminated, it is greatly reduced.
- Complete protection from creditors – This includes wage garnishment and debt collection.
- Classification of debts – Define the difference between debts incurred with a third party and those incurred with oneself.
- Dischargeable debts – Debt incurred due to fraud or purchases of luxury items purchased using a credit card.
- Protection for cosigners – If the payment plan is for the full amount of the obligation, your cosigners are protected from creditors.
- Unfathomable Future Chapter 13 petitions – At any point, you may file a later Chapter 13 petition.
- The lender protects the borrower against foreclosure.
- Increased time to repay non-dischargeable debts.
What are the Disadvantages of Chapter 13 Bankruptcy?
- Consumption should be kept to a minimum until your payment plan is complete.
- Expenses for legal counsel increased due to the more complicated bankruptcy process.
- Between three and five years is the requirement to repay debt.
- Brokers of stocks and commodities are prohibited from filing for this type of bankruptcy.
Although Chapter 7 bankruptcy is usually what people want to file because it’s the fastest, filing it still has consequences. You will be prevented from filing again in the next six years, and you cannot get new credit without a cosigner or an agreement with your creditors to repay them.
It is important to consult an experienced bankruptcy lawyer in Georgia. At the Law Office of Jeffrey B. Kelly (Kelly Can Help), you will be guided on the best way to proceed with your bankruptcy so you can get on your journey to a financial fresh start. Take advantage of our free case evaluation now.