The bankruptcy laws offer you two main choices if you decide to file for bankruptcy: Chapter 7 and Chapter 13. Bankruptcy is a Federal legal process in which consumers (or businesses) can eliminate or repay some or all of their debts under the protection of the Federal bankruptcy court.
Chapter 7, also called “the liquidation bankruptcy” means that the bankruptcy trustee might take or sell your property in order to repay some of your debts to your creditors. You do get to keep your exempt property such as clothes, furniture’s, etc. If you file for Chapter 7 it equals “an order of relief” meaning that most creditors will have to stop trying to collect what you owe them. For most people, the goal is to discharge (wipe out) some of their debts. Once the trustee liquidates your property and pays some of your creditors, you may not be required to pay the remaining balance, as long as they are NOT non-dischargeable debts. So even if you end up loosing some of your property you may not have to pay the total amount of your debts. Chapter 7 also appears as a convenient choice because the process only lasts from 3 to 5 months, when Chapter 13 can take years.
Chapter 13, also known “reorganization bankruptcy” will set up a 3 to 5 year repayment plan that will help you pay back your creditors if you failed to pay them on time. The time period is defined according to the amount of your debts and the amount you earn. In this scenario you will be able to keep most of your property but you will have to make a monthly effort to try to repay your creditors even if you usually end up paying much less than your outstanding balance of debts. The court will design a repayment plan that will describe how much and how you will repay your debts. For example, the court can decide that you will have to pay the full amount of certain debts considered as “priority debts” such as child support, alimony or wages you owe to your employees.
If for any reason you don’t manage to complete your repayment plan, the bankruptcy trustee can modify it or the court can discharge some of your debts on the basis of hardship. Also you might be able to convert to Chapter 7 liquidation bankruptcy.
If you complete your payment plan, any remaining balance will be discharged and your creditors will no longer be able to try to collect your debts.
Depending on your situation you might be able to apply to either Chapter 7 or Chapter13, or both.
To be eligible to Chapter 7, you must prove to the court that your income is low enough and that you are incapable of completing the Chapter 13 repayment plan. You will have to measure your current monthly income and pass the “means test” meaning that your monthly income is less than or equal to the median income of a household in your state.
You will not be able to file for Chapter 7 if you already received a discharge in the past 6 to 8 years or filed for Chapter 13 in the past 6 years.
In order to be eligible to Chapter 13, you must show the court that your disposable income is sufficient to complete the monthly payments of the repayment plan. To decide if your monthly income is sufficient, the court will compare the amount of your debts (secured and unsecured) to your income. If your total debts burden is too high, you won’t be able to file for Chapter 13 bankruptcy.
Certain debts such as child support, alimony or student loans can never be discharged even if you file for bankruptcy.
The bankruptcy laws distinguish two types of debts:
“Secured debts” are debts that give the creditors the right to take possession of a specific item of your property (such as a house or a car) if you don’t pay the debt you owe them. For some secured debts that are worth more than the property that secures them, you might be able to propose a plan that pays the creditor the actual value of the property and the remaining part of the debts will be discharged.
The “unsecured debts”, such as credit card debts do not give the right to creditors to take possession of your assets and are most of the time dischargeable when you file for bankruptcy.
Only debts that exist before the date of filing for bankruptcy can be discharged.
Before you file for bankruptcy you must complete credit card counseling with an agency approved by the United States Trustee’s office. The aim of the counseling is to give you an idea of whether you should file for bankruptcy or if you must choose alternatives such as informal repayment plans designed by the agency. You are only required to participate in the counseling session and don’t have to follow any plan submitted by them. Nevertheless, you will have to submit the plan proposal to the court as well as the certificate that you completed the counseling.
If you decide to file for bankruptcy, a meeting with the creditors will be scheduled after you filed in order to design your repayment plan and/or decide which creditors must be a priority.
Towards the end of your bankruptcy case, you will have to attend a different counseling session, this time to learn personal financial management and will also have to submit proof that you attended to the court.
The final session usually concludes your bankruptcy process.