If you feel overwhelmed by debt and don’t’ see any way out of the financial mire, then you need to know more about how to file for bankruptcy. The two major filings are Chapter 7 Bankruptcy and Chapter 13, each of which have different filing requirements.
In order to eliminate debt or control the actions of creditors, bankruptcy allows you to make a new start. Bankruptcy laws are designed to help hard-working people re-manage their budgets so they can better handle debt. A bankruptcy is noted on a credit report for a period of 7 to 10 years. However, during that time, you will have the opportunity to restore your rating by paying particular attention to your finances.
All chapters of bankruptcy give the filer the financial relief he needs by barring the collection efforts of creditors. This includes stopping such processes as harassing phone calls, the garnishment of wages, home foreclosure or creditor lawsuits. The financial relief and protection that is provided is known, legally, as an automatic stay. As soon as you make a bankruptcy filing, this automatic stay goes into effect immediately.
What is a Chapter 7 Bankruptcy
Chapter 7 bankruptcy is created for anyone who does not have the resources or ability to pay their existing obligations. It is intended for people whose debt is primarily unsecured. This type of filing is probably the most common type of personal bankruptcy filed in the court system today.
With a Chapter 7 bankruptcy, you can completely eliminate your unsecured debt if you meet the law’s “means test.” This kind of bankruptcy, also called a “straight bankruptcy,” will get rid of such unsecured obligations as personal loans, credit cards, dental bills and medical expenses.
Initially, during the filing process, you will need to supply a list of all account balances, credit card debts and similar information. When you file for the bankruptcy, again, you will automatically be safeguarded against lawsuits and collection efforts by creditors. At this point, you will also stop making any more payments on your debts.
With that being said, a Chapter 7 filing will not erase secured debts, such as obligations on mortgages or car loans. If you want to keep your property, you have to make the payments. You may be able to draw up and sign a reaffirmation of debt, or a document that is a promise to pay. However, the paperwork is optional. Chapter 7 filings also do not get rid of past due taxes, alimony, bad credit personal loans, child support or student loans.
Don’t Do the Following Actions if You File for Chapter 7
If you do decide to go ahead and file Chapter 7 bankruptcy, make it your goal not to do any of the following actions:
- Do not accumulate any more debt, including credit card charges and unsecured loans. If you try to borrow money when filing, you can face some serious issues.
- Do not transfer ownership of property, such as land, a home or your car. Doing so is construed legally as hiding your assets.
The bankruptcy process itself entails several steps – one which will include the appearance of at least one person in the Federal bankruptcy court. This type of appearance, however, is more like a formal meetng than an appearance in a traditional court of law. The court appoints a Federal attorney or trustee to manage you filing and case. In turn, the filer is requested, under oath, to confirm the details about his assets, debts and income, all which must be answered accurately, per the laws of perjury.
What is Chapter 13 Bankruptcy
Chapter 13 bankruptcy is a complete reorganization of debts for a person who makes a regular salary or receives a regular income. It is designed for any debtor that is behind on such secured debts as a car loan or a mortgage.
The goal of this kind of filing is to be able to maintain a regular schedule of monthly payments and pay any money still owed over time. According to U.S. Bankruptcy Code, a debtor is given a period of five years in which to repay creditors. Therefore, Chapter 13 makes it possible for a debtor to catch up on his payments and save his home or car.
A Court-ordered Consolidation
Unlike Chapter 7 bankruptcy, which is known as a “straight bankruptcy,” and which is more personal in nature, a Chapter 13 filing is known as a consumer bankruptcy or a court-ordered debt consolidation. This type of filing, in essence, permits the filer to consolidate all of his debts into one large payment. Therefore, after the filing is made, the filer makes one payment each month in order to ultimately retire the obligation. The repayment plan that is set up by the court is based on the filer’s debt amount, living expenses and income.
As with Chapter 7 bankruptcy, a Chapter 13 bankruptcy will not stop foreclosure, collections efforts, vehicle repossessions or the garnishment of wages. However, Chapter 13, unlike a Chapter 7 bankruptcy, can assist you in addressing the payback of tax debts or student loans.
A Chapter 13 filing entails a number of steps, one of which will include an –in-person visit in a Federal court of bankruptcy. The appearance is a formal meeting that takes place in the venue of a court. The filer does not have to state his case in a traditional courtroom. Like a Chapter 7 filing, the court appoints a Federal attorney or trustee to manage the bankruptcy case.
During the meeting, your trustee will take a look at the facts of the case and verify that the plan for repayment is workable. From that point, the case will be confirmed at another time by a Federal bankruptcy judge. Upon confirmation and approval of the repayment plan, the Chapter 13 filer will either have payments taken out automatically from his payroll check or he will make the one monthly payment to the trustee for his case.
The repayment plan for a Chapter 13 bankruptcy usually lasts for a period between three and five years. The filer always has the alternative, without suffering a penalty, to speed up the payments in order to retire the obligation sooner.
How Chapter 7 Applies to Individual Filers
Chapter 7 bankruptcy is used by individuals as well as corporations. The main difference between filing individually or as a business is how the case ends. For an individual, the filing ends with a discharge or a court order ending the person’s debt obligation. Once the discharge is issued and the case is closed, the filer can make a new start and rebuild his finances once again. Any unsecured debts, such as personal loans or credit card obligations, become a thing of the past.
Most individual cases of Chapter 7 bankruptcy are considered “no-asset.” In other words, the filer does not possess any assets in which to pay the claims of the creditors beyond exempt property (such as a listed home or car).
How Chapter 7 Applies to Business Filers
If a business files for Chapter 7 bankruptcy, its case will typically vary from an individual filing on several issues. That’s because the finances related to business transaction are usually more complicated than the budget of an individual.
When a corporation files Chapter 7 bankruptcy:
- The business will stop operating
- The business assets are sold or liquidated by the appointed trustee
- The proceeds of the sales are used to pay the creditors first and stockholders last
In a Chapter 7 filing for a business, the order for payment is, first directed to the secured creditors, where the obligations are backed by collateral. Therefore, payment must first be made for inventory, equipment, or real property. Next in line for payment are the creditors’ claims that are unsecured. These claims can include payments to customers, suppliers and lenders. Payment may include business investors, such as bondholders as well. The stockholders are given payment last, provided enough money remains after paying the other claims.
How to File for Chapter 7 Bankruptcy
In order to file for Chapter 7 bankruptcy, you need to pass a means test. Even if you meet the requirement, the court may still not grant you your wish to file if it determines you have sufficient disposable income in order to meet your debts. Before a filing takes place as well, you will need to take a credit counseling class.
This class must be taken and attached to the voluntary petition, or introductory paperwork for filing a Chapter 7 bankruptcy case. On the voluntary petition, you will disclose your name and address and supply basic info about the types of debts (business or consumer), assets and liabilities or any bankruptcies that were filed in the past eight years.
You will also have to include information on various schedules that list your personal property and any property that you wish to protect from the bankruptcy filing. Both secure and unsecured claims must be listed as well as your monthly budget or income on the plan.
How the New Bankruptcy Laws Affect Filing for Chapter 7 Bankruptcy
In 2005, legislators revamped the bankruptcy laws, thereby making it more difficult for some people to file for Chapter 7 bankruptcy. Some higher-income filers that are unable to pass the required “means” test will have to repay some of their debt in a Chapter 13 bankruptcy filing. Normally, Chapter 7 bankruptcy is considered a liquidation filing while a Chapter 13 filing is a repayment type filing. All bankruptcy filers must also take a credit counseling course before they can go through with the process.
The new bankruptcy law requires that potential filers measure their current monthly income for the month against the median income for their household in their state. If the income is calculated as being equal or less than what is considered median, they can file for Chapter 7 bankruptcy.
If their income is considered higher than median, then they need to take a means test to determine if they have enough income to file for Chapter 13 bankruptcy. To find out if they can pass the means test, they need to subtract certain expenses and debts from their current income for the month. If the income that is left is under a certain amount, they can file for Chapter 7.
How to Choose Between Filing for Chapter 7 and Chapter 13 Bankruptcy
Typically, if you do not have the income to meet your unsecured debt or are financially unable to meet your payment on credit cards, personal loans or similar uncollateralized financing, you can file for Chapter 7 bankruptcy. People who do not have much in the way of assets or an income normally find it more practical to proceed with a Chapter 7 bankruptcy plan.
However, if you want to save your house, because of foreclosure, and have enough disposable income to meet some of your obligations, it is better to file for repayment or Chapter 13 bankruptcy. Under this plan, some of your obligations are forgiven or erased while others, such as your house and car and other secured debt, are listed for repayment. A repayment plan is set up so you can catch up on any obligations and get back on track financially.
Advantages of Chapter 13 Bankruptcy
The primary advantages of filing a Chapter 13 bankruptcy include the following:
- You can keep both non-exempt and exempt property
- You have a certain time period in which to pay off your debts
- You can reduce the money you need to pay off your auto loan
- You can prevent repossession or foreclosure and repay your arrearages
- You can strip a second mortgage lien if you are upside down on your home loan, if applicable
- You can file again, even if you’ve previously filed for bankruptcy
Disadvantages of Chapter 13 Bankruptcy
There are three main disadvantages to filing Chapter 13 bankruptcy.
- Typically, all the disposable income must be paid to the court.
- The filing is usually higher when it comes to legal fees.
- If your secured debt is more than $922,000, you are ineligible to file.
How to File for Chapter 13 Bankruptcy
Before you file Chapter 13 or Chapter 7 bankruptcy, you must take a credit counseling course. This course must be taken before anyone can file for any type of bankruptcy. Once you’ve completed the course, you can fill out the necessary schedules and paperwork to proceed with the bankruptcy process.
The official forms include:
- A bankruptcy petition, which introduces your information and your case
- A series of schedules, all which provide the court with a clearer picture of your finances and income
Basically, the same forms are filed for a Chapter 7 or Chapter 13 bankruptcy filing, with some exceptions. You will need to list your personal property, any property you want to claim as exempt and secured and unsecured debt. You will also need to show how much you make each month. Basically, Chapter 13 bankruptcy is the wage earner’s bankruptcy while Chapter 7 is meant for those filers who do not make much in the way of an income.
When you do determine that you qualify, you will need to enter and segregate all your financial data on official bankruptcy forms. Then you will need draft a repayment plan. It is usually better to retain the services of a bankruptcy attorney than trying to go it alone. Although forms are available online, the process will be much more streamlined if you retain legal representation.
After you fill out the form, you will meet with the trustee for your case at the court to review the documentation and the repayment plan. Creditors may also attend the meeting to negotiate the terms of the repayment. Afterward, you will attend a hearing to see if the bankruptcy judge will confirm the repayment plan. During the process, creditors can raise objections and the judge will make rulings accordingly.
Legally, payments for the repayment plan must be rendered within 30 days. If you miss any of these payments, the case will be dismissed. However, if you go ahead and make the payments and complete the repayment plan, you will receive a bankruptcy discharge. The discharge relieves you of any payments for the unsecured debts listed on the payment plan.
Things to Know Before Filing for Chapter 13
Before filing for Chapter 13 bankruptcy, you need to analyze your debt. If the debts are excessive, you may not be able to outline a practical repayment plan. You must have a sufficient income in order to set up repayment. If you do not have the income needed, you cannot proceed.
Also, before making a filing, you need to know how much property you possess and how much of it is considered exempt. Both these findings will factor into how much you pay under a bankruptcy plan for Chapter 13.
As you can see both Chapter 7 and Chapter 13 bankruptcies are customized for the type of debt you have accumulated. If you don’t have much in the way of assets or an income, a Chapter 7 filing is a better plan to choose. If you have the needed disposable income to pay back your creditors for your secured debt, such as a house or car, then it is better to select Chapter 13 as a financial remedy.