A popular concept of bankruptcy is:
- You lose almost everything you own to pay off as much as possible of your debts.
- All your debts are wiped out
- You have to start from scratch to build a new life, including getting credit in the face of a bad record.
In the US, this is roughly a correct description of Chapter 7 bankruptcy for an individual. Other chapters of the US Bankruptcy Code provide other kinds of bankruptcy (including for businesses), of which the main alternative for an individual is Chapter 13 bankruptcy. If you are considering personal bankruptcy, you will probably have to choose between chapter 7 and chapter 13.
Any bankruptcy is an extreme solution. Before you choose a type of bankruptcy, check whether you can use one of these alternatives:
What is the difference between chapter 7 and chapter 13 bankruptcy?
Liquidation vs extended payments: Chapter 7 bankruptcy is a liquidation: virtually all assets are sold. Chapter 13 bankruptcy is an extended repayment arrangement, known as Adjustment of Debts. Both types end with a bankruptcy discharge, when the individual’s debts are wiped out and the individual starts over.
Loss of assets: In chapter 7, a debtor surrenders all their property to a case attorney. The case attorney converts the property into cash and pays back the creditors (the people the debtor owes). Certain property (called “exempt assets”) can be protected from seizure. Chapter 13 bankruptcy is designed for individuals who want to pay back their debts but need an extended period of time to do so. It does not require the debtor to sell their assets. In this type of bankruptcy, the debtor makes biweekly or monthly payments to the creditors. The amount for payback is based on how much they can afford after necessary living expenses.
No assets vs regular income: Generally a Chapter 7 bankruptcy is filed by a person with limited or no assets. With no assets, it is a relatively simple procedure. However, if the debtor has sufficient income to re-pay at least a portion of the debts, a Wage Earner Repayment Plan under Chapter 13 may be the way to go.
Unsecured debts and completion time:
In a typical Chapter 7 bankruptcy, the debtor does not pay anything to the unsecured creditors, unless the bankruptcy court requires them to liquidate non-exempt assets. A Chapter 7 bankruptcy is typically completed in a relatively short period of time, generally a number of months.
Although a Chapter 13 bankruptcy does not require selling assets, the debtor is required to repay some or all unsecured debt back through the court over a period of up to five years. The payments will be at least as much as the money creditors would receive if non-exempt assets were liquidated as part of a Chapter 7 bankruptcy. Upon the completion of the court-ordered repayment schedule, any unpaid unsecured debts are discharged.
Which bankruptcy chapter is right for me?
The correct option will depend on a number of factors, including your income, your ability to repay your debts, and where you live (the rules on exempt assets vary from state to state). Since the law is complicated, we suggest you contact a bankruptcy attorney to fully explore your options.
Since Chapter 7 bankruptcy typically involves no payments, and Chapter 13 bankruptcy involves payments for up to five years, why would anyone choose to deal with their debts through Chapter 13? There are four typical answers.
- The Bankruptcy Reform Act of 2005 has imposed a means test; if your income is too high, you cannot file for bankruptcy under Chapter 7; you must file under Chapter 13.
- If you are concerned about a foreclosure on your home, a Chapter 13 Wage Earner Plan may be a better option. Although a Chapter 7 petition delays foreclosure, it does not prevent it. In fact, it may require the property to be sold to satisfy the mortgage debt. In a Chapter 13 bankruptcy, the person filing the Wage Earner Plan may be able to negotiate with the mortgage holder to catch up in full on the mortgage arrears as part of the court approved repayment plan. Assuming the mortgage is brought up to date, the foreclosure is prevented.
- Even though Chapter 7 may be an option, you may simply not want to file for Chapter 7 bankruptcy. Since you know you borrowed the money, you may prefer to file a Chapter 13 repayment plan to deal with your debts.
- A Chapter 13 Wage Earner Plan generally allows you to retain all of your assets, so if you would lose assets in a Chapter 7 bankruptcy, Chapter 13 may be the best option for you. Chapter 7 bankruptcy, where a debtor's assets are liquidated, should be considered a last resort, and should only be filed if all other options have been explored and exhausted.
If you have a regular income, you may not qualify to file under chapter 7.
According to www.equifax.com, a bankruptcy can remain on your credit report for 10 years, which will impact your ability to obtain credit in the future.
Chapter 7 should be considered a last resort. A bankruptcy attorney can help you determine which bankruptcy chapter would best suit your personal needs.
What else do I need to know about bankruptcy?
The cost of filing for bankruptcy will vary depending on which chapter you choose. Fees are subject to change; however, you can expect that filing will cost approximately $300. You will also need to consider the cost of hiring a bankruptcy attorney.
As soon as the bankruptcy petition is stamped by the bankruptcy court, all creditors must stop collection efforts against the debtor, and you are immediately protected from your creditors.
There are several "do it yourself" books on bankruptcy that explain the bankruptcy process. However, bankruptcy law is complicated. To help make your decision, professional advice is always a good idea. Remember that the bankruptcy clerk's office staff, bankruptcy petition preparers, typing services and paralegals are prohibited by law from giving you legal advice. Only a lawyer can give you legal advice.
Most bankruptcy lawyers will give you a free consultation. They will go over your family situation, review your debts and your assets, and explain the different options. They will also explain what services they provide, and how much it will cost.
How can I decide my next step?
If you have not followed our three-step process to get here, go to debt consolidation to start the process. It is important that you thoroughly check other alternatives before proceeding with bankruptcy.
If you have come here by eliminating debt consolidation and credit counseling as options in your case, get an indication whether you qualify for Chapter 7 bankruptcy. For further information, check Chapter 13 bankruptcy and/or Chapter 7 bankruptcy.
If you know you wish to pursue bankruptcy, contact a bankruptcy lawyer to guide you through the process and ensure that your solution is truly the best one for your case.