Bankruptcy

Chapter 7

Chapter 7 bankruptcy can be filed by individuals (called a “consumer” Chapter 7) or businesses (called a “business” Chapter 7). A chapter 7 bankruptcy typically lasts 4-6 months.

Property liquidation

In Chapter 7 Bankruptcy, some of your property may be sold to pay down your debt. In return, most or all of your unsecured debts (that is, debts which collateral has not been pledged) will be erased. You get to keep any property that is classified as exempt under the state of federal laws available to you (such as your clothes, car and household furnishings). Many debtors who file for Chapter 7 bankruptcy are pleased to learn that all of their property is exempt.

Secured Debt

If you own money on a secured debt (for example, a car loan for which the car is pledged as a guarantee of payment), you have a choice of allowing the creditor to repossess the property; continuing payments on the property under the contract (if the lender agrees); or paying the creditor a lump sum amount equal to the current replacement value of the property. Secured debts cannot be eliminated with a Chapter 7.

Eligibility for Chapter 7

Not everyone can file for Chapter 7 bankruptcy. For example, if your disposable income is sufficient to fund a Chapter 13 repayment plan — after subtracting certain allowed expenses and monthly payments for certain debts — you won’t be allowed to file for Chapter 7 bankruptcy.

To qualify you must pass the “means test”, a formula designed to keep filers with higher incomes from filing for Chapter 7 bankruptcy. Only bankruptcy filers with primarily consumer debts, not business debts, need to take the means test. High income filers who fail the means test may file Chapter 13 bankruptcy to repay a portion of their debts, but may not file Chapter 7 bankruptcy to wipe out their debts altogether.

However, having to take the Chapter 7 means test doesn’t mean that you must be penniless in order to file Chapter 7 bankruptcy. You can earn significant monthly income and still qualify for Chapter 7 bankruptcy if you have a lot of expenses, such as a high mortgage payment or a car payment.

Repayment

When you file for Chapter 13 bankruptcy, you must propose a repayment plan that details how you are going to pay back your debts over the next three to five years. The minimum amount you’ll have to repay depends on how much you earn, how much you owe, and how much your unsecured creditors would have received if you’d filed for Chapter 7 bankruptcy.

Debt Limits

Your debts must be within limits set by the federal government: Currently, you may not have more than $1,149,525 in secured debt and $383,175 in unsecured debt.

Secured Debts

If you have secured debts, Chapter 13 gives you an option to make up missed payments to avoid repossession or foreclosure. You can include these past due amounts in your repayment plan and make them up over time.

Chapter 11

Chapter 11 is typically used by financially struggling businesses to reorganize their financial affairs. It is also available to individuals but because Chapter 11 bankruptcy is expensive and time-consuming, it is generally used only by those whose debts exceed the Chapter 13 bankruptcy limits (rare) or who own substantial nonexempt assets (such a several pieces of real estate).

Chapter 12

Chapter 12 is almost identical to Chapter 13 bankruptcy. But to be eligible for Chapter 12 bankruptcy, at least 80% of your debts must arise from the operation of a family farm. Chapter 12 bankruptcy has higher debt ceilings to accommodate the large debts that may come with operating a farm, and it offers the debtor more power to eliminate certain types of liens. Very few people use Chapter 12 bankruptcy.

If you are facing overwhelming debt, call us today for a free consultation to discuss your options.