What is Chapter 7 v. Chapter 13 Bankruptcy?

Chapter 7 bankruptcy is a liquidation chapter whereby the debtor lists the assets owned and liabilities owed to seek discharge on the debts. Despite Chapter 7 being a liquidation chapter, it is rare that a debtor will lose any asset the debtor wishes to keep because the debtor is able to exempt property to protect those assets from creditors and the bankruptcy trustee.

Chapter 13 bankruptcy is a reorganization chapter wherein a debtor seeks to reorganize the debts and pay what the debtor is able to pay. The debtor will propose a plan of repayment based upon available income after paying basic living expenses. Unless debts are paid in full sooner, a Chapter 13 plan lasts three-to-five years.

Who is eligible to file bankruptcy?

Individuals and married couples are eligible to file bankruptcy. A debtor is eligible to receive a discharge of debts in a Chapter 7 bankruptcy if the debtor has not filed, and received a discharge in, a previous Chapter 7 bankruptcy filed within the previous eight years, or filed, and received a discharge in, a Chapter 13 bankruptcy within the previous six years.

A debtor is eligible to receive a discharge of debts in a Chapter 13 bankruptcy if the individual has not filed, and received a discharge in, a previous Chapter 7 bankruptcy filed within the previous four years, or filed, and received a discharge in, a Chapter 13 bankruptcy within the previous two years. A debtor may still file, if it is determined to be necessary, a Chapter 13 bankruptcy without meeting the above criteria, but the debtor will not receive a discharge at the conclusion.

What property can I keep when filing bankruptcy?

A debtor, whether filing Chapter 7 or Chapter 13 bankruptcy, may elect to exempt various types of property to avoid the risk of losing assets by filing. Generally, debtors in a Chapter 13 bankruptcy do not lose assets unless the debtor chooses to surrender an asset, as the debtor is making payments in the reorganization rather than give up property.

Most Chapter 7 bankruptcy cases do not result in loss of an asset as most debtors do not have property whose value exceeds the limits allowed by law. Only in those cases where the equity in an asset exceeds the limit would a debtor be at risk of losing an asset. Common exemptions, and the amounts of equity which can be exempted currently include: personal residence – $161,375, motor vehicle – $4,450, Cash, money on deposit, etc. – $550, household items (e.g. furniture, appliances, clothing, etc.) – $14,875, jewelry – $1,875, tools of the trade – $2,825, personal injury settlements – $27,950, and “wild card” (whatever you choose) – $1,475.

Generally, retirement accounts are not at risk. Also, the portion of tax refunds attributable to earned income credit or child tax credit is also protected. Cash value in life insurance is also exempt provided the beneficiary is a spouse or dependent.

Assets that may be at risk, in addition to amounts in excess of the exemption limits, include that portion of tax refunds for return of tax withheld.

Can I file for Chapter 7 or Chapter 13 bankruptcy more than once?

You can only file for a Chapter 7 bankruptcy if you have not filed for, and received a discharge is, a Chapter 7 bankruptcy within the previous eight years or a Chapter 13 bankruptcy within the previous six years.

You can file a Chapter 13 bankruptcy without restriction. However, you may not receive a discharge in a Chapter 13 bankruptcy if you filed, and received a discharge in, a Chapter 7 bankruptcy within the previous four years or a Chapter 13 bankruptcy within the previous two years.

There is no lifetime limit on filing if you meet the above criteria.

Will bankruptcy affect my credit?

The fact that you file will remain on your credit for seven to ten years. That you file will be factor that a potential credit grantor will consider when deciding whether to extend credit and, if so, at what interest rate. It is not true to state that bankruptcy will prevent you from receiving credit. It is true that it will generally reduce your credit score. It is also true that, generally, the further in distance the bankruptcy filing is from when you seek to obtain new credit, the less impact the bankruptcy is likely to have on your ability to obtain new credit.

It is also generally the case that any creditors which you keep and continue to pay are more willing to consider a later extension of credit. It is also generally the case that it becomes easier to obtain credit after filing bankruptcy once one has been able to show positive payment history after filing. These are just general statements and not an assurance that your situation may be the same.

How does Chapter 13 work?

A Chapter 13 is a reorganization whereby a debtor determines what the debtor can afford to pay creditors to reorganize debt. Repayment involves several factors.

First, a debtor is required to pay “disposable income”. That is the difference between income received and necessary living expenses.

Second, a debtor must meet the “best interest of creditors” test. This is a formula for determining how much money, if any, unsecured creditors would have received had the case been filed under Chapter 7. This would typically only come into play if the debtor had non-exempt assets (property worth more than can be protected) which would be at risk of loss had the debtor filed a Chapter 7 bankruptcy.

Third, generally, a debtor must, during the duration of the Chapter 13 bankruptcy, pay all secured debts (for example, a vehicle) and priority debts (such as a recent income tax obligation or a domestic support obligation such as child or spousal support arrears) before the debtor could receive a discharge in a Chapter 13.

The debtor should work with the attorney to come up with a plan that meets the requirements of the law while enabling the debtor to meet the debtor’s own personal living expenses.

Will creditors accept a debt settlement plan?

Unlike a Chapter 13 bankruptcy, which is entered into through court, a creditor is not required to accept a private debt settlement plan. While private debt settlement plans may be good option, it is important to keep several factors in mind.

First, there is not a mechanism outside the Court to require a creditor to accept a proposed plan to pay a debt.

Second, be aware of other potential creditors when agreeing to a debt settlement plan. Working out an arrangement with one creditor may lead to other creditors appearing with their hands out, thus making the previous agreement with the first creditor more than the debtor can manage.

Third, a private settlement plan does not stop a court garnishment unless the creditor voluntarily agrees to stop it.

Fourth, if the private debt settlement plan involves a third party saving up funds that you transmit to them, until they enough on hand to make a settlement offer, beware that the creditor, or other creditors, can pursue legal action against you.

Fifth, be aware that cancellation of debt is a taxable event and you should expect to receive a 1099-C from the creditor and, potentially, to have to pay income taxes on the amount of debt canceled through the debt settlement plan. This is not the case with a bankruptcy discharge.

Lastly, make certain, if considering a private debt settlement plan through a third party, how their fees are to be handled. Most cannot get you a better deal than you can obtain for yourself. In addition, there are many non-profit debt reorganization entities that will assist you in resolving debt for little or no fee up front.

What happens to my credit during a debt settlement plan?

If the creditors are reporting to one or more of the credit reporting companies, you should expect that they will continue to do so while the debt settlement plan is being sought. This could result in a further lowering of your credit score due to payments not being made that the last payment received being further in the past. Completion of a debt settlement plan will likely result in that event being noted, not as paid in full.

Will I lose my vehicle if I file bankruptcy?

Very few clients lose a vehicle, unless they choose to, when filing for bankruptcy. If the debtor files a Chapter 13 bankruptcy, the debtor is making payments rather than run the risk of losing the asset. If the debtor files a Chapter 7 bankruptcy and the vehicle has equity less than the exemption amount (currently $4,450), then the debtor is not risking loss of the vehicle by filing a Chapter 7. The debtor would have to continue to make payments on the vehicle to retain in a Chapter 7 at, almost certainly, the same terms as at filing. If the debtor is delinquent on payments at filing, however, the debtor would usually need to bring the account current within a fairly short period of time (perhaps 30-45 days) in order to retain the vehicle.

If the vehicle has equity in excess of the exempt amount, it may be possible to file a Chapter 7 bankruptcy and still retain the vehicle. This would likely require obtaining money from an outside source to “redeem” the vehicle from the bankruptcy trustee (that is to pay the excess equity). This can be money from a relative, from an otherwise exempt source such as retirement funds, or from a financial institution that offers loans for redemption (caution: the interest rate can be quite high).

Keep in mind that a debtor can only claim as exempt one vehicle and the exemption belongs to the “owner” of the vehicle under the law. So, for example, if a couple file for Chapter 7 bankruptcy and have two vehicles, but both are titled to the same individual, only that individual can claim an exemption and the other vehicle, if it has any equity, is subject to loss to the bankruptcy trustee.

Does bankruptcy stop foreclosure of my home or garnishment of my paycheck?

Yes. Filing a bankruptcy, either under Chapter 7 or Chapter 13, creates a stay automatically which all other civil action against the debtor or property of the debtor, provided the debtor has not had two other bankruptcy cases within the prior year. Money taken by garnishment from a paycheck must stop and, in some instances, recovery of moneys already taken may be possible. Lawsuits against the debtor also stop while the bankruptcy is ongoing. If the debtor receives a discharge of the debt, the lawsuit is likely ended by the bankruptcy discharge.

A foreclosure sale is stopped by the filing of the bankruptcy. However, that will not change the need to bring the mortgage loan current if the debtor wishes to retain the real estate. This would most commonly be done through the filing of a Chapter 13 bankruptcy.

I am married, but my spouse does not want to file. Can I file by myself?

Certainly. The fact that you are married does not require that your spouse also file if it is not otherwise necessary. We will need some information from your spouse, if you are living together, related to your spouse’s income and expenses, for your filing to be completed.

Do I have to list all of my debts?

Yes. You are required to list all creditors to whom you owe money. However, it may be possible to keep certain creditors. Generally, if you are current on your vehicle or your home and do not have excess equity ion the item, you may keep the vehicle or home provided you continue to make your payments.

Keeping an unsecured debt, such as a credit card, may be more difficult. Your attorney can advise as to the specifics.

Are there some debts which I cannot discharge?

Yes. Most taxes, student loans, domestic support obligations such as child support or spousal support, court fines or restitution, money obtained through fraud or embezzlement, or damages from operating a motor vehicle while under the influence are not dischargeable. If you used a credit card to pay a non-dischargeable debt such as a tax obligation, that would also not be dischargeable. You must still list all creditors however. Omitting a debt could result in loss of your discharge.