Chapter 7 is often called “straight bankruptcy” or “liquidation.” In Chapter 7, debtors walk away from their dischargeable debts and their non-exempt assets are liquidated by the Chapter 7 trustee to repay the creditors. Most Chapter 7 cases filed by individuals are “no-asset” cases – which means there is no property available for the trustee to sell. No-asset cases typically last approximately 3 to 4 months. People usually file Chapter 7 when (a) they have no non-exempt assets to lose; (b) they can’t afford a repayment plan; or (c) they simply want to put all of the financial stress behind them and obtain a fresh start.
Chapter 13 is a repayment plan administered by the Bankruptcy Court. The debtor proposes a plan and makes payments to the Chapter 13 trustee, who then disburses the funds to creditors based upon the terms of the confirmed plan. Chapter 13 cases typically last between 3 and 5 years. During the term of the plan, the debtor’s property and assets are under the jurisdiction of the Bankruptcy Court and the debtor cannot incur debt or dispose of his or her assets without the Court’s prior approval. People usually file a Chapter 13 case when (a) they have debts that cannot be dealt with in Chapter 7; (b) they have assets they would lose in Chapter 7; (c) they are not eligible to receive a Chapter 7 discharge; or, (d) they earn too much money to qualify for Chapter 7.
The decision regarding which chapter to proceed under is extremely important. Every client’s situation is different and the correct choice depends on the particular facts of that client’s case. There are positives and negatives to filing under either chapter, so it is very important that you be completely candid and forthcoming when discussing your case with your attorney. Remember: an attorney’s advice usually is only as good as the information it is based upon.
Generally, the Automatic Stay is a temporary injunction that goes into effect immediately upon the filing of a bankruptcy petition. It prevents most creditors from continuing to try to collect their debts from the debtor and the debtor’s property. The provisions of the Automatic Stay are found at 11 U.S.C. Section 362(a).
The discharge is a permanent injunction issued by the Bankruptcy Court (usually at the end of a bankruptcy case) which prohibits creditors from trying to collect certain debts from the debtor and the debtor’s property.
This is a highly-debated topic nationwide. Presently, in order to discharge student loans, a debtor must meet a very difficult standard: the debtor must prove to the Court that not discharging the student loans would create an “undue hardship” for the debtor. Essentially, this means that the debtor must show that the debtor cannot maintain a minimal standard of living if forced to repay the loans, that circumstances exist indicating that this situation is likely to persist for a significant portion of the student loan repayment period, and that the debtor has made good faith efforts to re-pay the loans.
Priority debts are a separate class of unsecured debt which receive preference over (they get paid before) general, unsecured debts. The most common examples of priority debts are recent income taxes and past-due child support/alimony obligations. The list of priority debts is set out at 11 U.S.C. Section 507.
A secured debt is a debt where the creditor holds a lien or other security interest in the debtor’s property. Mortgages, title loans, and judgments are some examples of secured debts.
A discharge in bankruptcy is limited to the individual debtor who filed the bankruptcy case. Your co-debtor’s liability will not be affected by your discharge and the creditor may still pursue the co-debtor. Chapter 7 does not have any provision for protecting co-debtors. Chapter 13, however, has the co-debtor stay (11 U.S.C. Section 1301) which prevents collection actions against the co-debtor and allows the debtor to re-pay that debt in full through the plan.
The 341 Meeting of Creditors is a mandatory hearing in every Chapter 7 and Chapter 13 case. See 11 U.S.C. Section 341(a). In Chapter 7 cases, the 341 Meeting allows the trustee to question the debtor regarding any assets that might be available to liquidate for the benefit of the debtor’s creditors. In Chapter 13 cases, it allows the trustee to interview the debtor to see if (a) the proposed plan meets the requirements of the law; and, (b) the debtor is performing the requirements of the plan.
In Chapter 7 cases, the trustee is an individual appointed to find, collect, and liquidate any of the debtor’s non-exempt assets and distribute the proceeds to the debtor’s creditors. In Chapter 13 cases, the trustee monitors the case to ensure that the plan complies with the law and that the debtor is complying with the plan; the Chapter 13 trustee also receives, distributes, and accounts for the plan payments.
Immediately upon the filing of a bankruptcy petition, the bankruptcy estate is created. In Chapter 7, it consists of all of the debtor’s assets at the time the case is filed (except assets which are statutorily excluded or claimed exempt). It also includes inheritances, life insurance proceeds, and property settlements, which the debtor becomes entitled to within 6 months after the case is filed. See 11 U.S.C. Section 541. The bankruptcy estate in Chapter 13 includes all of the property which would be included in a Chapter 7 estate, plus any property the debtor acquires after the case is filed and while the case is pending. See 11 U.S.C. Section 1306.
The bankruptcy estate is very expansive and falls within the Bankruptcy Court’s exclusive in rem jurisdiction. Consequently, debtors may not dispose of, sell, quitclaim, pledge, gift, trade-in, or otherwise transfer property of the bankruptcy estate without first obtaining the Court’s authorization.
When enacting the bankruptcy laws, Congress made a policy decision to allow debtors to retain a minimal amount of their assets so that when they exited bankruptcy they could still contribute as viable members of society. Exempt property is property which a debtor is allowed to keep exclusively from the reach of the trustee and creditors. The exemption laws vary from state to state and a debtor’s decision regarding which chapter to file under often hinges upon which state’s exemptions that debtor is allowed to claim. In order to take advantage of an exemption, the debtor specifically must claim the property as exempt in his or her bankruptcy schedules. Otherwise, the property will be part of the bankruptcy estate.
Confirmation is simply the Bankruptcy Court’s approval of the debtor’s proposed Chapter 13 plan. The order confirming the plan binds the debtor and all creditors to the terms of the repayment plan. See 11 U.S.C. Section 1327.
A reaffirmation agreement is a voluntary agreement between the debtor and a creditor in a Chapter 7 case. It allows the debtor to retain the creditor’s collateral and sets forth a re-payment arrangement which will not be discharged in debtor’s case. The agreement must be made before the discharge order is entered and must be filed in writing with the Court. The debtor may rescind the agreement upon notice to the creditor either before the discharge order is entered or within 60 days after the agreement is filed with the Court, whichever is later.
The Applicable Commitment Period is the minimum length of time that a Chapter 13 case must last when the debtor is not proposing to re-pay his or her creditors in full. For “under the median” (lower income) debtors, the ACP is 36 months. For “over the median” (higher income) debtors, the ACP is 60 months. The ACP should not be confused with the actual time the case is projected to last. Many attorneys calculate Chapter 13 plans to run 60 months in order to keep the plan payments lower, even though the ACP only requires 36 months.
Yes. In order to be eligible to file either Chapter 7 or Chapter 13, individuals first must complete a short, credit counseling course. This course is inexpensive and can be done over the internet. The course must be completed before you will be eligible to file. After your case is filed, and before your discharge is granted, you will need to take a second course. This course is a little longer and consists of watching a video over the internet. You will not be eligible for a discharge until the second course is completed. If you fail to complete it, your case will be closed without a discharge – which can result in additional worry and expenses for you – so we recommend that you take the second course promptly after your receive your bankruptcy case number. If you do not have access to the internet, you can arrange to take these courses on a computer in our office.