If you have taken a loan individually or on behalf of your business and are unable to pay back the same and face either personal bankruptcy or bankruptcy for business, you may have to take the help of the courts. In the US, federal laws govern the rules and procedures for filing bankruptcy. There are different types of bankruptcies and you need to file all bankruptcy-related claims with the US Bankruptcy Court.
The US federal government has made legal provisions that allow you to have your debts discharged by the courts. Bankruptcy courts have the power to excuse you from repaying some or all of your debt.
Bankruptcy filing is broadly classified into five – Chapter 7, 9, 11, 12, and 13 bankruptcies. Of these filing Chapter 7 or 13 are most common. So, which is better Chapter 7 or Chapter 13? Let’s find out.
Chapter 7 and Chapter 13 bankruptcies
The most common types of bankruptcies are Chapter 7 bankruptcy and Chapter 13 bankruptcy. If your business is under debt, you need to initiate Chapter 11 business organization and rehabilitation petitions.
Filing for Chapter 7 bankruptcy or liquidation bankruptcy brings into force ‘automatic stay’ that immediately stops most creditors from collecting payments from you. However, you have to turn over all your ‘non-exempt’ property to a supervising officer known as the bankruptcy trustee.
The state or federal law determines which property is exempt.
The federal exemptions include:
- Equity in your home: $16,500.
● Equity in your car: $2,575.
● $425 per item in any household goods up to $8,625.
● $1,625 in job-related books, tools, etc.
● $850 in any property and part of the unused exemption in your home totaling up to $8,075.
If a married couple files bankruptcy together, the exemption amount will be doubled. The exempted property generally includes specific assets, such as essential clothing, household items, work tools, and in some instances, vehicles and home.
The trustee officer will take your non-exempt property, if you have one, and sell it. Office will then distribute the proceeds of the sale among your creditors. Although by doing so, the creditors may only receive a fraction of their claims, the balance loans, and obligations get exempted permanently, never to be paid. This way, you stand to benefit from this. If, your creditors still try to collect their debts after discharge, they can face severe penalties.
Chapter 13 bankruptcy (reorganization bankruptcy) comes to your rescue if you have non-exempt property but don’t want to give it up. This allows you to keep your property. For this, you need to be in a position to make monthly payments to your creditors towards your debt. However, you need to repay the debts within a course of three to five years.
There are several benefits of Chapter 13 bankruptcy. Not only do you get to keep your property, but you are able to restructure your secured debts, such as a car loan. Restructuring a car loan involves reducing the principal to the market value of the collateral and lowering payments by extending the repayment period to 60 months. Chapter 13 bankruptcy also allows modifying mortgages, student loans, and tax liabilities. In this, your creditors don’t have any say at all.
Is bankruptcy available to all?
Unfortunately, no. If you have had a debt discharged within the past eight years under Chapter 7, you are not permitted to re-file. In the case of Chapter 13, the waiting period extends for six years. At times, some debtors may have the means to pay the creditors, since they have a good amount of disposable income, but still go in for bankruptcy.
To prevent this, a ‘means test’ has been put in place that gauges the repayment capacity of the debtor by comparing it with the average earning of the population of the state. If the debtors are found to be making enough money to repay their creditors, they are debarred from filing a liquidation bankruptcy. However, reorganization still remains an option for them.
How much debt should be there to file for bankruptcy?
There are no set rules for this, but some experts suggest that you should only file for bankruptcy if you have at least $15,000 to $20,000 in debt. You can file for less debt, but it has got two drawbacks. First, it may be difficult to persuade the court that a discharge on the small amount is warranted. Secondly, the damage caused to your credit rating may outweigh the benefit of discharging a smaller debt load.
Should I file for Chapter 7 or Chapter 13?
Wonder which is the right option for your situation? Read on to analyze some key scenarios:
- Mortgages and car loans: If you are planning to file a Chapter 7, most likely you will have to return your car or house to the creditor or pay its wholesale value. The problem arises in an upside-down mortgage, where you owe more than your house is worth, where you may stand to lose. In Chapter 13, you may be allowed to keep your car or house.
- Debts owned due to past crimes: You will not be able to get a discharge on your debt in Chapter 7 if your creditor objects and is able to prove your prior court conviction. In Chapter 13, you need to pay your creditors as per plan, but if you fail to pay your outstanding debts in full by the end of Chapter 13 bankruptcy, the balance stands to be wiped out.
- Debts owed for child support, alimony, student loans: You cannot avoid paying the debt owed for child support, alimony and student loans through Chapter 7 bankruptcy. The court will not discharge these debts. In Chapter 13, in case you fail to pay off these debts, you will need to continue doing so, even after bankruptcy is over.
- Non-support debts owed in a divorce, property settlement or agreement: A Chapter 7 filing may not discharge the debt, if your creditor, such as spouse, objects. However, you can get a discharge if you show the court that you will not be able to pay these debts after bankruptcy and if the benefit of a discharge overcomes the adverse situation created for the creditor. In Chapter 13, the remaining balance, if any, will be erased at the end of bankruptcy.
Filing for bankruptcy
Filing under Chapter 7 or 13 entails complying with numerous federal laws and regulations. You need to file bankruptcy with utmost care, for a mistake at any step of the process may result in the court’s refusal to discharge your liabilities. Of course, this will have disastrous consequences for you.
The only sensible way out is to hire a competent licensed bankruptcy lawyer, who is well versed in bankruptcy federal laws and regulations. He or she will be the one who will help you submit a petition and deposit fees in the bankruptcy court.
The lawyer will also ensure that the petition contains your sworn statement about the amount of money you owe to the creditors, your income and expenses and a complete list of your assets. This information in the petition is reviewed through a court hearing after the bankruptcy is filed.
Will filing bankruptcy end financial problems?
Unfortunately, no. It cannot end every financial problem. For one, it usually doesn’t eliminate debts owed to ‘secured’ creditors. However, it may allow debt restructuring.
Bankruptcy will also not discharge the following debts:
- Debts incurred within 180 days of filing bankruptcy.
● Child support.
● Court fines and penalties.
● Taxes that have accrued over the past three years.
● Debts not included in your bankruptcy petition.
● Loans obtained through fraud.
● Student loans that became due, less than seven years before bankruptcy was filed.
● Debts arising after bankruptcy has been filed.
Difference between Chapter 7 and Chapter 13 bankruptcies
Filing for bankruptcy (Chapter 7 bankruptcy or Chapter 13 bankruptcy) is based on the income level. Chapter 7 generally pertains to those who fall below a certain income level.
Another significant difference between the two bankruptcies are Chapter 7 is simpler to file and takes less time, whereas Chapter 13 takes more time. For example, of all the bankruptcy cases filed, Chapter 7 bankruptcies constitute almost 71 percent, while the remaining 29 percent are Chapter 13 bankruptcies.
What’s the difference between Chapter 7 bankruptcy and Chapter 13 bankruptcy?
Chapter 7 vs. Chapter 13 bankruptcy
Let us see the differences between a Chapter 7 and chapter 13 filing.
- Chapter 7 bankruptcy is liquidation bankruptcy, whereas Chapter 13 is reorganization bankruptcy.
- To qualify for Chapter 7, the debtor’s disposable income must be low enough to pass the ‘means test’. However, in Chapter 13, the debtor cannot have an unsecured debt of more than $394,725 or secured debt of $1,184,200.
- In Chapter 7, it usually takes three to four months to receive a discharge, whereas, in Chapter 13 bankruptcy, you can obtain the discharge upon completion of all plan payments. This usually takes three to five years.
- In Chapter 7 bankruptcy, the court-appointed trustee can sell all non-exempt property and distribute the proceeds among the creditors. However, in Chapter 13 bankruptcy, the debtor can keep the property, but has to pay unsecured creditors an amount equal to the value of non-exempt assets.
- Whereas Chapter 13 bankruptcy allows removing unsecured junior liens from the real property through lien stripping, Chapter 7 bankruptcy has no such provisions.
- Chapter 7 bankruptcy allows reducing the principal loan balance on secured debts, but only on tangible personal property. Chapter 13 bankruptcy does so without any rider, except that all requirements are met.
- Both Chapter 7 and Chapter 13 have their own benefits. Chapter 7 bankruptcy allows debtors to quickly discharge qualifying debts and get a fresh start. Whereas, Chapter 13 allows debtors to keep their property and catch up on non-dischargeable priority debt payments and missed mortgage and car debt payments.
Both bankruptcies have some drawbacks too. Although Chapter 7 bankruptcy allows the trustee to sell the non-exempt property, it has no provisions for debtors to catch up on missed payments that may result in foreclosure or repossession. In Chapter 13 bankruptcy the debtor has to make monthly payments to the trustee for three to five years. The debtor may have to pay back a portion of general unsecured debts.
What are the other different types of bankruptcies?
As previously mentioned, there are three more different types of bankruptcies in addition to Chapter 7 and Chapter 13. They are Chapter 11, 12 and 9.
- Chapter 11 bankruptcy
When a commercial enterprise faces bankruptcy, the debtor takes recourse to Chapter 11 bankruptcy. This enables the debtor to continue business operations while agreeing to repay creditors through a court-approved reorganization plan. For this, the debtor gets 120 days, after the order for relief, to file a plan of reorganization.
The debtor needs to give a disclosure statement to creditors that allow them to evaluate the plan. However, the final approval of the plan rests with the court. Chapter 11 provides a number of options to the debtor for returning the business to profitability. These include:
○ Repaying a portion of debts to reduce them, while discharging others.
○ Discharging contracts and leases that are proving a burden on the debtor.
○ Choosing to rescale operations of the business.
The reorganization plan ultimately leads the debtor to consolidate his or her business and end up with a reduced debt load. This also helps the debtor to reorganize the business and make it more profitable.
- Chapter 12 bankruptcy
A Chapter 12 bankruptcy is basically meant for family farmers with regular annual income. It allows the debtor to offer a debt repayment plan over a period of three to five years.
For this, the bankruptcy court appoints a trustee to supervise the bankruptcy process and payment to the creditors. Chapter 12 bankruptcy allows the debtor to continue to operate the farm while carrying out the plan.
- Chapter 9 bankruptcy
A Chapter 9 bankruptcy is for a municipality that includes villages, towns, cities, counties, school districts, taxing districts and municipal utilities. If they file for bankruptcy, they have to do so under Chapter 9. In this, the municipality proposes a repayment plan for reorganizing, which is similar to Chapter 11 bankruptcy.
Highlighting the difference between Chapter 7 and Chapter 13 bankruptcies will help you in knowing what type of bankruptcy is right for you. Although your lawyer will guide you in this, still it is better to be aware of what bankruptcy is all about and what are the different types of bankruptcies.
David Galler is an experienced bankruptcy attorney based in Atlanta, Georgia. For the last 29 years he has filed over 10,000 bankruptcy cases. He has a FIVE STAR client rating on Avvo, Kudzu.com, RateABiz.com, and Google+, among other sites. Over 99% of all Chapter 7 cases he filed have been discharged.