What is Bankruptcy?
Simply put, bankruptcy is the process by which consumers may reduce or repay their debts under protection of bankruptcy courts. Bankruptcies generally are in the form of liquidation or reorganization.
Chapter 7 of the Title 11 of the United States Code (Bankruptcy Code) governs the process of liquidation under the bankruptcy laws of the United States for consumers. It’s called liquidation because a bankruptcy-court appointed trustee may take and sell ("liquidate") some of your property to pay off some of your debt. However, certain property is exempt and therefore protected under state law. Chapter 13 is the most commonly used Code for reorganization bankruptcies for consumers. Under a Chapter 13 bankruptcy, consumers may keep all of their property, and agree to make monthly payments over three to five years to pay back all or some of their debt. Both Chapter 7 and Chapter 13 bankruptcy have many rules -- and exceptions to those rules -- regarding which debts are covered, who can file, and what property you can and cannot keep.
Consumers should beware. While bankruptcy may seem like a tried and true approach to reducing one’s debt, a Chapter 7 bankruptcy negatively impacts an individual's credit report for 10 years from the date of filing the chapter 7 petition, and a Chapter 13 bankruptcy negatively impacts an individual's credit report for 7 years from the date of filing the chapter 13 petition. This may make credit less available or at much higher rates and may also hinder a person from obtaining certain employment.
Another aspect to consider is whether you can avoid a challenge by the United States Trustee to you Chapter 7 filing as abusive. One factor in considering whether the U.S. Trustee can prevail in a challenge to your Chapter 7 filing is whether you can otherwise afford to repay some or all of your debts out of disposable income in the five year time frame provided by Chapter 13. If so, then the U.S. Trustee may succeed in preventing the debtor from receiving a discharge under Chapter 7, effectively forcing the debtor into Chapter 13.
It is widely held amongst bankruptcy practitioners that the U.S. Trustee has become much more aggressive in recent times in pursuing (what the U.S. Trustee believes to be) abusive Chapter 7 filings. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has clarified this area of concern by making changes to the U.S. Bankruptcy Code that include, along with many other reforms, language imposing a means test for Chapter 7 cases.
Chapter 7 Bankruptcy
A Chapter 7 bankruptcy typically takes about three to six months to complete.
Property liquidation. In Chapter 7 bankruptcy, specified property belonging to you may be sold to repay your debt. After which, most, if not all, of your unsecured debts (debts for which collateral has not been pledged) will be expunge. You get to keep all exempt property under the state or federal laws available to you (i.e., clothing, autos, and household furnishings).
Secured debt. If you owe money on a secured loan (e.g., a car loan for which the car is pledged as collateral), you choose to have such property repossessed; continue to make payments on the property according to the loan agreement; or pay a lump sum to the creditor equal to the current replacement value of the property.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is also known as "wage earner" bankruptcy because, in order to file for Chapter 13, you must have a reliable source of income that you can use to repay some portion of your debt.
Repayment. To file for Chapter 13 bankruptcy, you need to propose a repayment plan that details how you are going to pay back your debts over the next three to five years. Minimum repayment amounts depend 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. The federal government has established debt limits for Chapter 13 reorgainzations: Currently, you are not permitted to have more than $1,010, 650 in secured debt and $336,900 in unsecured debt.
Secured debts. For secured debts, Chapter 13 provides for you to make up missed payments to avoid repossession or foreclosure.
This information is intended to provide a brief overview of consumer bankruptcy programs. Bankruptcy laws are very complicated. A consumer should consult with a bankruptcy attorney when considering filing for bankruptcy. We recommend that you first consider RRL Finance.