Bankruptcy laws were created to help people that can’t pay their creditors get a clean slate of the debts they owe. Depending on the bankruptcy chapter filed, this happens either by potentially liquidating the filer’s assets to pay debts, or by entering into a court supervised repayment plan. In some bankruptcy filings, both liquidation and repayment are used simultaneously.
When individuals or married couples file for bankruptcy, it’s referred to as a “personal” or “consumer bankruptcy”. The most common types of personal bankruptcy are Chapter 7, and Chapter 13 (chapters of the United States Bankruptcy Code). All bankruptcies must be filed in federal court. While bankruptcy information prevalent all over the Internet, one importnat aspect to note is that bankruptcy a federal matter; no bankruptcy can be filed in any state court.
Chapter 7 Bankruptcy
Chapter 7, also known as “liquidation bankruptcy,” is the most common type of personal bankruptcy filed. It’s available to individuals and married couples who file jointly. Chapter 7 eliminates all of the filer’s dischargeable debt, leaving the person or couple debt free in most instances after the bankruptcy is concluded. Student loans and government fines such as parking tickets are not eliminated in a Chapter 7.
The court cost, or filing fee, for Chapter 7 is $299. A Chapter 7 can only be filed once every eight years, at it typically takes 4 months or so to run its course. Completing credit counseling with an agency approved by the United States Trustee is required to successfully file a Chapter 7 bankruptcy and receive a discharge. (For a list of all approved agencies in your state, see the U.S. Trustee’s website and select “Credit Counseling and Debtor Education.”)
A “Trustee” is appointed by the court in each Chapter 7 to monitor the case and represent the creditors listed within one’s bankruptcy petition. It is the Trustee’s job to gather and sell any “nonexempt property” for repayment to the creditors. “Nonexempt” refers to what assets your state says you can keep through a bankruptcy process. You’re able to keep any “exempt” property when filing Chapter 7, such as a certain amount of cash, household goods, etc. In a majority of Chapter 7s filed nationwide, none of the filer’s assets are liquidated by the Trustee and all dischargeable debt is eliminated.
To successfully file a Chapter 7 bankruptcy, a person or couple must qualify financially. If one earns less than the median income for a family of their size in their state, they can file for Chapter 7 without any further issues. However, if one’s income for their family size is above their state’s median income, their household’s income and expenses must pass the bankruptcy court’s “Means Test” to qualify for Chapter 7. Those who can’t qualify for Chapter 7 must file a Chapter 13 bankruptcy.
Chapter 13 Bankruptcy
Chapter 13 is also known the “repayment plan” or “wage earner’s bankruptcy”. In a Chapter 13 one files a plan showing the bankruptcy court how they’ll repay their debts over a five year (60 month) period. A monthly consolidated payment is made by the filer to the Bankruptcy Trustee who then disperses that payment out to the filer’s creditors. Because the filer’s plan requires regular monthly or even biweekly payments, Chapter 13 is usually only appropriate for those who have a stable source of monthly income.
Filing a Chapter 13 stops all collection activity against the filer and it is often preferred by people who have a valuable asset, such as a home in foreclosure that they want to keep. The Chapter 13 plan allows the filer to catch up on overdue payments, such as mortgage arrears. It is also often filed by individuals and married couples who want to keep an asset such a house that may be liquidated in a Chapter 7, or by those who have filed a Chapter 7 in the last eight years. It can also be filed to stop IRS collection of unpaid taxes. Chapter 13 is also usually the only option under the bankruptcy code for those prospective Chapter 7 filers who don’t pass the “Means Test“.
The filing fee for Chapter 13 is $274. There is technically no legal limit to the amount of times one can file Chapter 13 within a given timeframe, although most courts discourage repetitive filers. Completing credit counseling with an agency approved by the United States Trustee is also required to successfully file a Chapter 13 bankruptcy and receive a discharge. (For a list of all approved agencies in your state, see the U.S. Trustee’s website and select “Credit Counseling and Debtor Education.”)
Chapter 13s are typically much more complex legal proceedings than Chapter 7s and should never be filed without the assistance of an attorney.