Bankruptcy - Choosing The Best Chapter

Bankruptcy - Choosing The Best Chapter

There are two bankruptcy chapters utilized by most individuals including Chapter 7 - Liquidation and Chapter 13 - Reorganization. Both chapters provide an "automatic stay" which prohibits creditors from continuing and taking certain adverse actions against the debtor.

 

There are two bankruptcy chapters utilized by most individuals including Chapter 7 - Liquidation and Chapter 13 - Reorganization. Both chapters provide an "automatic stay" which prohibits creditors from continuing and taking certain adverse actions against the debtor.


Chapter 7

A Chapter 7 liquidation is the most common type of bankruptcy filing. It involves the appointment of a trustee, who collects the non-exempt property of the debtor, sells it, and then distributes the proceeds to the debtor's creditors. Generally, Chapter 7 cannot be used to discharge (get rid of) recent taxes, child support, alimony, student loans, drunk-driving judgments, criminal fines or restitution, or debts that involved fraud or intentional wrongdoing. Corporations cannot receive a discharge under Chapter 7. What is considered "exempt" and "non-exempt" varies between the federal and state governments, and state regulations may prevail over federal regulations. Liens typically survive bankruptcy; therefore to retain collateral used as security for a loan (i.e. a house with a mortgage), the debtor must remain current on his/her mortgage payments, as the bank will retain its foreclosure rights.

To qualify for a discharge under Chapter 7, if the majority of the debtor's debts are consumer related (i.e., personal in nature), the debtor must satisfy the "Means Test" (i.e., the debtor cannot earn more than a certain amount of income per year). Alternatively, the debtor may qualify for a discharge under Chapter 7, notwithstanding his/her income, if the majority of the debtor's debts are business related, as opposed to consumer related.


Chapter 13

If the debtor has regular income and unsecured debt of less than $336,900 and secured debt equal to or less than $1,010,650, then Chapter 13 is an option. Chapter 13 is a reorganization/repayment chapter whereby the debtor makes regular periodic payments to a Chapter 13 trustee who pays the debtor's creditors off over a period of 3 to 5 years.

Repayment plans in Chapter 13 can range from 10 to 100 percent, depending on the debtor's income and the amount and kind of debt obligations. The benefit of Chapter 13 is that a debtor can continue to keep his/her property even if the property serves as collateral for a secured loan, and even if the debtor is behind (in arrears) on the loan payments. Secured creditors, including fully secured first mortgages and possibly second or third mortgages, will continue to receive regular payments outside the plan. Certain debts that cannot be discharged in Chapter 7 can be discharged in Chapter 13, such as recent debt, criminal fines, and debt incurred by fraud. A debtor can also pay back past due tax obligations over a period of time. Chapter 13 also helps debtor's prevent foreclosures and repossessions while catching up on their secured debts.

 

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