Chapter 7 & Chapter 13

Chapter 7 bankruptcy is a liquidation proceeding.

The debtor turns over all non-exempt property to the bankruptcy trustee who then converts it to cash for distribution to the creditors. There are exemptions for different asset categories (we will discuss this when we meet) and, thus, the majority of Chapter 7 cases are “No Asset” cases.

The debtor receives a discharge of all dischargeable debts usually within four months. Because in the vast majority of cases the debtor has no non-exempt assets, a Chapter 7 will give that person a relatively quick “Fresh Start”. Benefits of a Chapter 7 filing begin the moment that the case is filed with a legal stay that immediately prevents creditors from taking any further action against the debtor.

One of the primary purposes of Bankruptcy Law is to give a person, who is hopelessly burdened with debt, a fresh start by eliminating their debt.

Chapter 13 Bankruptcy is also known as a reorganization bankruptcy.

Individuals who want to pay off their debts over a period of three to five years file Chapter 13 Bankruptcy. Also, some debtors will only qualify for a Chapter 13 Bankruptcy if their income is above the median income level for their family size (we will discuss this when we meet).

This type of bankruptcy appeals to individuals who have non-exempt property that they want to keep. A Chapter 13 Bankruptcy can help a debtor save their home by paying the arrears over a period of 3-5 years. If the house is worth less than what is owed on a first mortgage, a second mortgage can be stripped away in a Chapter 13 filing.

In Chapter 13, a debtor must have predictable income sufficient to pay their reasonable expenses with some amount left over to pay a monthly amount to the Chapter 13 trustee. But it is extremely rare in a Chapter 13 case that the debtor ends up paying a significant amount towards their unsecured debt.

For the majority of individuals, Chapter 7 is still available to them.

There has been much written about the Bankruptcy Means Test under the new laws for Chapter 7 Bankruptcy. It’s true that there are more steps under the new laws and the Bankruptcy Means Test will result in some people having to file Chapter 13 instead of Chapter 7.

By law, all actions against a debtor must cease once the bankruptcy documents are filed.

Creditors cannot initiate or continue any lawsuits, wage garnishees, or even telephone calls demanding payments.

• A number of banks offer “secured” credit cards where the debtor puts up a certain amount of money (i.e. $500) in an account at the bank to guarantee payment. Usually, the credit limit is equal to the security given and is increased as the debtor proves his or her ability to pay the debt.

• Two years after a bankruptcy discharge, debtors are eligible for mortgage loans with terms similar to those with the same financial profile as those who have not filed bankruptcy.

• A Chapter 7 Bankruptcy filing will stay on an individual’s credit report for 10 years from the date of filing. But this does not mean that an individual cannot obtain credit for 10 years (the bankruptcy filing becomes less significant the further in the past the bankruptcy is). For many people, a bankruptcy filing will actually improve their credit score within a short period of time. And, as discussed above, after the discharge (about 90 days after filing the Chapter 7 Bankruptcy) a secured credit card will be immediately available to a debtor, car loans will be available, unsecured credit cards will be available within a year, and a mortgage will be available in two years.