Many people have come across the word bankruptcy but do not have a full understanding of the process, what it entails, and how it is recommended for fighting debts with a bankruptcy lawyer and financial instability. In this article, we will discuss bankruptcy while analyzing the difference between the two major options available to consumers: Chapter 7 and Chapter 13 bankruptcy.
What You Should Know About Bankruptcy Courts
Unlike most other cases that are heard either in criminal or civil courts, each judicial district in the United States has its own bankruptcy court where all bankruptcy cases are heard. Each state across the U.S. has no less than one judicial district with a total of 90 judicial districts in the country.
The judges presiding over bankruptcy cases have the legal authority to pronounce binding judgment on cases relating to bankruptcy filings. Some of the cases that are presided over by these judges include eligibility issues, and debt discharge issues. It is important to note that most of the processes involved in a bankruptcy filing are carried on out outside of the courthouse and the debtor is allowed very little access or interaction with the judge based on the structured process of the case filing.
The Main Goal Of Bankruptcy
The federal bankruptcy laws have been designed to help consumers to better deal with financial instability. In essence, bankruptcy has been designed to help consumers get creditors off their backs especially in cases of heavy debts. The consumer is presented with a fresh start and a clean slate once bankruptcy filing has been positively decided on. Following the bankruptcy discharge, a debtor or borrower is absolved of the personal liability for certain debts.
The Different Types of Bankruptcy
When dealing with bankruptcy, there is a need to understand that businesses and individuals are considered to be separate entities. A lawyer will most likely ask to know whether you are asking as a business or an individual when you seek to learn more about bankruptcy.
In essence, bankruptcy can mean different things to different entities. Below are the different types of bankruptcy under the U.S. Bankruptcy Code.
Chapter 7 Bankruptcy
Chapter 7 Bankruptcy is also known as liquidation in the U.S. Bankruptcy Code. Chapter 7 Bankruptcy is one that allows most of the debtor’s assets to be sold for cash, that is, asset liquidation.
However, under Chapter 7 bankruptcy, certain assets may not be liquidated as they are protected under the Bankruptcy exemption law of Chapter 7 bankruptcy.
A no-asset case is a Chapter 7 bankruptcy case where the debtor has little to no assets that aren’t exempted for liquidation. In addition, creditors with unsecured claims (for example, credit card issuers) may not receive proceeds from the liquidated assets, especially if the company has failed to file a proof of claim with the court.
Chapter 13 Bankruptcy
Chapter 13 Bankruptcy is also known as “Adjustment Of Debts Of An Individual With Regular Income”. The major difference between Chapter 7 and Chapter 13 bankruptcy filing is that the debtor in the case of chapter 13 has a regular income which can help them pay off the debts over an extended period of time.
Chapter 13 bankruptcy is best suited for people who have a regular income but are unable to shoulder the financial strains of the debts incurred in a short period of time. Usually, Chapter 13 allows the debtor to work out a favorable plan to repay creditors over a longer time frame, say between three to five years.
The repayment plan which has been drafted may be approved or rejected by the court at a confirmation hearing. The decision to accept or reject the repayment plan is based on whether the plan meets with the requirements of the established Code.
In a Chapter 13 bankruptcy filing, as opposed to the Chapter 7 filing, the debtor may remain in possession of their properties while making payments to the creditor via a trustee.
The Major Differences Between Chapter 7 and Chapter 13 Bankruptcy
Mortgages and Car Loans
Under Chapter 7, a debtor will most likely be required to return the house or car to the creditor (especially if the car has been used as collateral in securing a loan). The debtor may also be given an option to pay the wholesale value of the item to the creditor.
Chapter 13, however, does not involve property repossession. Instead, the debtor remains in possession of the property while a payment system will be worked out.
Chapter 7 will most likely fail to discharge debts owed as a result of past crimes, especially if the creditor can demonstrate or prove the consumer’s prior acts. Chapter 13, however, will require the debtor to pay for these debts but may allow for balance to be wiped out if the total debt has not been repaid fully at the end of Chapter 13 bankruptcy.
Child Support, Alimony, Student Loans, Tax debts
Under Chapter 7, a debtor will not be forgiven of these debts.
Chapter 13 is no different as a consumer will still owe the balance on the debt if they are unable to pay it off during Chapter 13 bankruptcy.
Nonsupport debts owed in Property Settlement, Divorce, or Agreements
Under Chapter 7, the debt will not be discharged if the creditor (in this case, the spouse) objects. However, the debts may be discharged if the debtor demonstrated that they will still be unable to pay off the debt after bankruptcy and that the benefits of wiping the debts are far greater than the detriment to the creditor. Under Chapter 13, all balances at the end of the chapter 13 bankruptcy will be wiped clean.
Co-Debtors on Personal Loans
Under Chapter 7, creditors can seek payment from co-debtors
Under Chapter 13, based on the repayment plan that has been drawn, creditors are not allowed to approach co-debtors for the duration of the bankruptcy.
Non-Exempt Valuable Properties
For properties that are not covered under the exemption rule, a person filing Chapter 7 bankruptcy will be required to submit all of those properties unless the debtors can come up with a fair value for creditors. Under Chapter 13, all non-exempt valuable properties can be kept by the debtor.
Paying Creditors to Keep Secured Property
Chapter 7 bankruptcy allows debtors to pay creditors the wholesale value of properties in a lump sum. Chapter 13 bankruptcy allows debtors to pay a replacement value in addition to interest over the duration of the bankruptcy.
Debtors With Prior Bankruptcy
Chapter 7 bankruptcy cannot be filed twice unless a person has a prior Chapter 13.
Chapter 13 bankruptcy can be re-filed.