Bankruptcy is a procedure whereby federal law allows individuals and businesses to discharge debt in order to reorganize and get a fresh start. In discharging a debt, the debtor is no longer legally liable or obligated to repay the monies owed. Bankruptcy can be the most practical and powerful tool to revitalize either your individual finances or business finances. The bankruptcy laws provide for several different types of bankruptcies. Each type is different and the needs and circumstances of each individual or business are required to be assessed prior to choosing which chapter of the bankruptcy code to utilize in discharging your debt. It is of utmost importance to understand what is appropriate for your situation prior to filing for bankruptcy relief.
What type of Bankruptcy is right for you?
Chapter 7
A Chapter 7 bankruptcy is the most streamlined path to a fresh start for individuals struggling with debt. In order to be eligible for a Chapter 7 Bankruptcy, an individual needs to prove to the bankruptcy court that their income isn’tsufficient to pay even a portion of the outstanding debt. There is a “means test” which is used to determine eligibility. Chapter 7 is a liquidation bankruptcy, which means that the law requires that certain property be sold to pay unsecured creditors in exchange for relief. The sale is handled by the bankruptcy Trustee, and the Trustee can only sell property that is not protected by an exception provided for under the Bankruptcy code. If all of an individual’s property is covered by an exemption it cannot be sold by the Trustee. In that case, an individual’s creditors would receive nothing, and the individual would get to keep their property.
In a majority of personal Chapter 7 cases, nearly all property is protected by an exemption under state law. If there are no assets which fall outside an exemption, a Chapter 7 case lasts usually no more than six months. The Bankruptcy Discharge, the Court Order that eliminates dischargeable debt, is usually granted in about four months after the filing of the bankruptcy petition.
Chapter 13
Chapter 13 bankruptcy is a reorganization type bankruptcy. It involves a repayment plan that typically only pays a portion of the petitioner’s total debt. In order to qualify for a Chapter 13 Bankruptcy, a petitioner’s secured debt and unsecured debt cannot exceed a threshold limit set by the federal law.
Logistically, the petitioner creates a repayment budget based on their monthly income and living expenses and tells the bankruptcy court what they can afford to pay on their debts each month. The Court and the Trustee review the proposed repayment plan. If approved by the Court, the petitioner will need to pay their disposable income to the trustee and provide their tax returns on a yearly basis. Any debt that isn’t repaid during the repayment plan period is wiped out at the expiration of the repayment period.
In some cases, people will file a Chapter 13 bankruptcy instead of a Chapter 7 because they make too much money to qualify for the latter. Some choose Chapter 13 because it gives them benefitsthey would not receive under a Chapter 7. Choosing the right type of Bankruptcy for your individual or business needs is something that should be discussed with a professional prior to filing. Contact us today to discuss your bankruptcy needs.