With our economy in a recession and markets melting down, many Americans are turning to our Nation’s Bankruptcy Courts as a means to get a fresh start in the wake of a financial crisis. The most common types of personal bankruptcy for individuals are Chapter 7 and Chapter 13. Corporations and other business forms often file under Chapter 7 or Chapter 11.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is the most common type of bankruptcy; it is sometimes referred to as “liquidation bankruptcy,” or “straight bankruptcy.” The basic purpose of chapter 7 is to provide you with a fresh start by wiping out all qualifying debts including credit cards, medical bills, repossession deficiencies, law suits as well as a variety of other debts. Bankruptcy lawyers can help with the process. In chapter 7, there is no repayment required for most unsecured debts, your debts are wiped out completely and permanently. In about 99% of chapter 7 cases, the consumer keeps all property, and eliminates most debts. The entire process usually takes less than 4 months to complete. After the bankruptcy is over, the consumer may choose to selectively pay back debts, such as debts to family members, however repayment is not legally required.
In Chapter 7 bankruptcy the typical consumer only has one meeting with the bankruptcy trustee. The purpose of the meeting is to give creditors a chance to ask questions, although it is very rare that a creditor shows up; it is mostly handled by attorneys. The trustee may also ask you questions about particular items on your petition usually focusing on assets or income. Most meetings take only a few minutes. Some consumers feel some level of anxiety or fear leading up to the meeting with the bankruptcy trustee, but there is no reason to fear the trustee. The trustee is looking for people who are hiding assets or trying to defraud the system, they don’t want to harass or scare the common consumer. The meeting will take place in an ordinary conference room, and the trustee is not a judge; the setting is informal. After the meeting, the first thing most people say is “…that’s it?…that was easy.” Once the meeting with the trustee is done, the only thing left to do is keep your address current with the court, and wait for your discharge to come in the mail.
Chapter 13 Bankruptcy
Chapter 13 Bankruptcy provides consumers with a way to consolidate debt under federal law and repay creditors a portion of what is owed over time. The idea behind chapter 13 is that the consumer makes sufficient income to pay all current living expenses (rent, food, car, utilities, etc.), but not enough to pay off all debts in full or comply with creditor’s demands. In chapter 13, living expenses are paid first, and then whatever is left over goes into the consolidation plan. The plan is not based on what you owe (in most cases); instead, it is based on your ability to repay creditors. The calculation of your plan payments involves many variables, but most importantly it is based on your income and expenses. Whatever is left at the end of the month goes into the plan, even if it only pays creditors pennies on the dollar. Chapter 13 can be particularly useful for consumers with assets over the exemption amounts, or non-dischargeable debts.
In Chapter 13 Bankruptcy, you must submit a plan in which you set out a budget detailing your take-home pay and monthly living expenses. Any excess income is paid to the bankruptcy trustee who then distributes money to creditors on a pro-rata basis. The plan lasts for 36 to 60 months, unless your debts are fully repaid in a shorter period of time. At the end of the chapter 13 plan, any amounts still owing on your unsecured debts are forgiven. Chapter 13 payments can be automatically withdrawn from your bank account by the trustee if you choose.