Chapter 7 vs Chapter 13

Bankruptcy Chapter 7 vs Chapter 13

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is also called liquidation bankruptcy, it cancels your debts, but you might have to let the bankruptcy court liquidate some of your property for the benefit of your creditors.

Chapter 7 bankruptcy refers to the chapter of the federal statutes of the US Bankruptcy Code that contains the bankruptcy law.

Bankruptcy Forms
To file for bankruptcy, you fill out a two page petition and several additional forms. Then you file the petition and forms with the bankruptcy court in your district. Basically, the forms ask you to describe:

  • property

  • current income and its sources

  • current monthly living expenses

  • debts

  • property you claim the law allows you to keep through the bankruptcy process (exempt property -- most states let you keep some equity in your home, clothing, household furnishings, Social Security payments you haven't spent, and other necessities such as a car and the tools of your trade).

  • property you owned and money you spent during the previous two years, and property you sold or gave away during the previous two years.

  • If you're facing an emergency, like a foreclosure or repossession in the next few days, you can file just the petition, but you must file the rest of the forms within 15 days.

Automatic Stay
Filing for bankruptcy puts into effect an "Order for Relief" known as "automatic stay." The automatic stay immediately stops your creditors from trying to collect what you owe them. So, temporarily, creditors cannot legally garnish your wages, empty your bank account, go after your car, house, or other property, or cut off your utility service.

The Bankruptcy Discharge
At the end of the bankruptcy process, all of your debts are discharged by the court, except:

  • debts that automatically survive bankruptcy, unless the court rules otherwise

  • debts that the court has declared nondischargeable because the creditor objected (for example, debts incurred by fraud)

Chapter 13 Bankruptcy

Chapter 13 bankruptcy, called the reorganization bankruptcy, is very different from Chapter 7 bankruptcy (which wipes out most of your debts). In a Chapter 13 bankruptcy, you use your income to pay some or all of what you owe to your creditors over a period of time. Most Chapter 13 bankruptcies last three years. Some last longer a court can approve a case as long as five years. A few are shorter if you pay off 100% of your debts in less than three years, your case will be over sooner.

Chapter 13 bankruptcy isn't for everyone. If your income is too low or irregular, you may not be eligible. To file for Chapter 13, bankruptcy, you must have a steady income.

If your total debt burden is too high, you are also ineligible. Your secured debts cannot exceed $922,975, and your unsecured debts cannot be more than $307,675. A secured debt is one that gives a creditor the right to take a specific item of property (such as your house or car) if you don't pay the debt. An unsecured debt doesn't give the creditor this right. Examples of unsecured debts are credit card and medical bills.

Chapter 13 Bankruptcy
Repayment Plan

This form is the most important paper in your entire Chapter 13 bankruptcy case. It describes in detail how (and how much) you will repay on every one of your debts. There is no official form for the plan, but many courts have designed their own forms.

Chapter 13 Bankruptcy How Much You Must Pay

Usually, you will make reduced payments on your unsecured debts, and the regular payments for any secured debts. The exact "reduced" amount you must pay unsecured creditors is based on many calculations.

Most repayment plans last three years. After that, any remaining unpaid balance on the unsecured debts is discharged, unless the debt is not dischargeable by law. In some cases, the court will approve a plan in excess of three years, up to five years.

New Bankruptcy Bill

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