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Chapter 7 & Chapter 13

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Bankruptcy - Chapter 7 & Chapter 13

Bankruptcy may not be the end-all solution it's made out to be. One should carefully consider all options before taking this path.

Debt got you down? You're not alone. Consumer debt is at an all-time high. What's more, record numbers of consumers are filing for bankruptcy. Whether your debt dilemma is the result of an illness, unemployment, or simply situations that were completely out of your control, it can seem overwhelming. And, although bankruptcy is one option - it's generally considered "the option of last
resort." The decision to file bankruptcy is one that should be thought out very carefully. The reason: it has a long-term negative impact on your credit worthiness. A bankruptcy stays on your credit report for as long 10 years, and can hinder your ability to get credit, a job, insurance, or even a place to live. Unfortunately, many people learn only after filing for bankruptcy thatthere are associated pit-falls and long-lasting negative effects. There are different types of bankruptcy, each having its own guidelines and limitations. Financial circumstances often prohibit consumers from instantaneously eliminating all of their debt.

The Process of filing Bankruptcy
Title 11 of the U.S. Code governs bankruptcy proceedings and if you choose to file for bankruptcy this information will be made available through public records. In a bankruptcy proceeding, you must file a bankruptcy petition, complete schedules of assets and liabilities, and prepare a statement of financial affairs. These forms require you to list your property and account for recent sales of personal property. They also require you to list your income and all debts owed, and to account for any money that you spent during the two-year period prior to filing. Court costs are in addition to your attorneys fees and are approximately $175.

The Lingering Effects of Bankruptcy
Though bankruptcy may be a very good solution to a severe financial problem, filing carries negative effects that follow the debtor. For example: the debtor may lose property that is non-exempt (unprotected). In addition, the bankruptcy will appear on your credit report for no less than seven years depending on which type of bankruptcy is filed. Chapter 7 will normally be reported for 10 years because it does not involve any form of repayment program to creditors and debts are completely discharged. Chapter 13 on the other hand, implements a payment plan and although it carries less of a stigma, it will remain within your credit report file for 7 years. Filing bankruptcy carries a negative stigma because it suggests that an individual does not know how to manage their funds or live up to their financial obligations. However, bankruptcy gives the debtor the ability to "wipe the slate clean" and get a fresh start. The after-effects of bankruptcy are severe, and require re-establishment of creditor confidence, which often takes time to establish. Overall, bankruptcy may be a relatively quick and easy solution to financial woes, but it is also a quick way to severely damage credit. Repairing credit often requires a considerable amount of time and there is no simple solution to damaged credit.

In Chapter 7 cases, the debtor is required to attend at least one meeting of creditors, during which the debtor may be required to give sworn testimony about their finances by the bankruptcy trustee and the creditors. In Chapter 13 cases, the debtor may be required to attend multiple meetings with the creditors to work out a repayment program in detail. Also, if creditors are in disagreement with the debtor’s listed assets, a valuation hearing may be required.

During a bankruptcy proceeding, if a creditor suspects that a consumer is withholding information, or that assets have been hidden or transferred to other individuals, the creditor is entitled to question the debtor at the meeting(s) of creditors. The creditor also reserves the right to file an adversary proceeding if they feel that a claim is non-dischargeable. Typically, a creditor will file an adversary proceeding against claims involving criminal misconduct, such as debts incurred on the basis of fraud, larceny, breach of trust, or embezzlement. Debts from willful or malicious injury to another person or their property may also be non-dischargeable. The creditor may also file an adversary proceeding against damages arising from drunk driving obligations. The trustee will be particularly interested in determining if the debtor/filer is attempting to abuse the bankruptcy system and will be examining the following:

If there are any assets that are non-exempt
If the debtor has concealed or transferred assets
If the debtor ran up debts prior to filing
If the debtor used false information on credit applications to obtain credit.
If a debtor is found guilty of misconduct, their debts will not be discharged.
Additionally, the trustee may attempt to recover any assets that were transferred out of the debtor’s name and may continue the liquidation of assets for the benefit of the creditors.

The Most Common Forms of Bankruptcy

Chapter 7 Bankruptcy
In Chapter 7 the debtor is allowed to retain all assets that are considered exempt assets. Filing under Chapter 7 may require court liquidation of non-exempt personal property. This means that the trustee may sell unprotected personal property to repay the creditors who loaned money to the debtor. *Non-exempt assets may include collateral such as a house, car, or land. *There are limitations from state to state that determine what personal property may be exempted but Chapter 7 provides adequate protection for most assets. Chapter 7 completely eliminates a debtor's legal liability and responsibility for repaying unsecured debt. However, a debtor who is behind on secured debt, such as a home or car, will remain obligated to repay the debt, including the past due amount. For chapter 7 bankruptcies, the time frame from filing to receipt of discharge can usually take anywhere from 3 to 5 months.

The following debts cannot be discharged through Chapter 7:

Credit card, personal loans, and installment purchases made within 40 days of filing.
Debts resulting from fraud.
Debts resulting from DUI or reckless driving.
Fines from traffic tickets or debts that result from criminal negligence.
Debts from willful or malicious injury to another person or their property.
Alimony.
Child Support.
Student Loans(*)
Income Taxes (**)

Chapter 13 Bankruptcy
Chapter 13 differs from Chapter 7 because it involves a repayment plan that is submitted to the trustee and the bankruptcy court for approval. The debtor is required to create a feasible monthly budget that will enable them to meet their basic needs and still be able to afford to make scheduled payments to the bankruptcy trustee. This formal plan is prepared and submitted with the bankruptcy petition to determine how much money will be repaid to the creditors through a deed trust payment each month.

Chapter 13 permits a debtor to repay in monthly installments for three to five years. It also allows the debtor to keep all of their assets, even if their value exceeds the amount of the exemptions allowed by the state. To qualify for chapter 13, you must have a consistent and stable income, your unsecured debts must be less than $250,000, and your secured debts must total less than $750,000.

Chapter 13 also allows a debtor who was in arrears on federal income tax to establish a payment program through which they can pay the IRS back over time. Under chapter 13 the automatic stay will protect any cosigners on the consumer's debts. Also, Chapter 13 bankruptcy is not discharged until all deed trust payments have been made which usually takes three to five years.

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* In 1998 the law changed with regard to discharge of student loans. Prior bankruptcy law allowed student loans to be discharged once they were 7 years or older from the day they were first due. Currently, student loans cannot be discharged unless the debtor passes an undue hardship test. The debtor has to prove that theymade good faith efforts to repay the loan and prove that they cannot maintain aminimal standard of living if forced to repay the loan(s). The guidelines of a "minimalstandard of living" are very rigid and discharge of student loans under Chapter 7 is uncommon.

** Generally speaking, for taxes to be discharged, the following criteria must be met:

A tax return for the year in question was filed at least two years before
the bankruptcy.
The tax is over three years old.
The tax was assessed more than eight months before the bankruptcy
was filed.
The debtor did not willfully evade the tax.

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