Q. After seven years of unemployment and mounting debt, I have decided to file for bankruptcy. I have about $135,000 in debt – almost half this debt is from credit cards, while the other half is made up of personal loans that I have taken out and which was secured by my home. I am facing foreclosure and I have been advised that there are three major types of bankruptcy – can you provide me with an explanation of which Bankruptcy I should consider?
A. There are three main categories of Bankruptcy. Since you have been unemployed, I am going to assume you are filing bankruptcy as an individual rather then as a business. Chapter 11 deals with companies that are reorganizing themselves while they continue to operate and repay their creditors back. You are likely filing as an individual or as a married couple. The two types of bankruptcies you will likely need to choose from is Chapter 7 or Chapter 13.
Filing For Chapter 7 Bankruptcy
Chapter 7 is complete liquidation pursuant to a well-defined court-supervised procedure in which the bankruptcy trustee assumes control over your assets and converts them into cash. The trustee then distributes the cash to the creditors.
Under Chapter 7 the debtor has the right to keep certain property known as exempt property. Normally exempt property will not include secured property such as a car purchased on credit or a home with an outstanding morgtage – both forms of property having been collateralized as secured debts.
Under secured property law, your secired creditors will be able to regain possession of their assets and if there is any deficiency between what the secured creditor receives back in the bankruptcy proceeding and what is still owed to the creditor, the deficiency amount will usually be discharged in favor of the debtor. This is good news for you.
However, in most Chapter 7 cases, there are rarely any nonexempt property left over by the time the debtor finally files for bankruptcy protection. These types of cases are commonly referred to as no-asset cases.
Unsecured creditors in these cases will almost always receive nothing and the debtor will almost always receive a full discharge of all personal liability for the debts. But there are nondischargable exceptions that include, but are not limited to, child support payments, student loans, and back taxes – to name just a few.
Once the bankruptcy petition is filed the debtor can usually expect to receive her discharge in about three months depending on the complexity of the case. In 2005, then President, George Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act, which effectively made it more difficult for debtors like yourself to qualify for Chapter 7 relief. This was a bill that was written by banks and lenders, for the benefit of banks and lenders.
As of 2013, the courts are still employing what is called a “means test” to determine whether a debtor can qualify for full liquidation under Chapter 7. Normally, the court will require the debtor produce evidence that her income/debt ratio meet certain threshold requirements. The net effect of the means test is to limit the number of debtors who can qualify under Chapter 7 relief and forcing them into Chapter 13 repayment plans.
Filing For Chapter 13 Bankrutpcy
This option is often referred to as a the workout-repayment bankrutpcy option. It applies to debtors that still have income and assets but are upsidedown on both.
Under Chapter 13 cases the debtor is allowed to keep some of their valuable asset, such as a home, and the debtor must submit to the bankruptcy court a “creditor repayment plan” which is calculated to satisfy the creditors claims usually over a time period of five years.
The obvious downside to Chapter 13 cases is that debtors get forced into Chapter 13 repayment plans, even though they might have extremely limited assets and income. The consequence of this option is that the debtor can get locked in to an ardeous amd oppresive repayment schedule that will prevent the debtor from receiving a fresh start - a concept that has always been the major rationale behind the right to bankrucpty since its inception.
Under Chapter 13, the debtor must complete the payments per the creditor workout plan before the court will issue a full discharge. In the meantime, the debtor is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect.
Given your situation, you will likely benefit from filing under Chapter 7. The real issue is whether the bankruptcy court will approve your Chapter 7 case or force you to file under Chapter 13.
Finally, Bankruptcy will remain on your record for ten years.
