There are several different chapters of bankruptcy. Chapter 11 is for corporations. Chapter 12 is for family farmers. There are even special chapters of bankruptcy just for railroads and cities. However, the most common types of bankruptcy are Chapter 7 and Chapter 13. Chapter 7 is generally known as a liquidation bankruptcy and lasts about four to five months while Chapter 13 is a payment plan that lasts three to five years.
Chapter 7 bankruptcy allows you to walk away from unsecured debts, such as credit cards, pay day loans, and medical bills. You won’t have to pay those debts back. Secured debts, such as a mortgage, vehicle loans, and title pawns are treated differently depending on what you want to do. If you want to keep your house and vehicles, then you must keep paying for them and be current on your payments. You will sign an agreement with the creditor called a Reaffirmation Agreement and you continue to pay that debt at the same monthly amount you have always paid. If you can’t afford to keep your house or vehicle, you can give it back to the creditor and walk away owing nothing.
Chapter 13 is a debt consolidation bankruptcy with a monthly payment plan. Payment plans are three to five years. A payment plan is made specifically for each person, so the options on how to structure your particular plan are endless. Some of the most common items that are repaid in a payment plan are past-due mortgage payments, past-due vehicle payments, back taxes, back child support, and many secured loans. Unlike a Chapter 7, sometimes interest rates on vehicles can be lowered and paid through the payment plan. As far as unsecured debt, there are a lot of factors which play into whether or not you have to pay all of the debt, some of the debt, or even none of the debt. Your local bankruptcy attorney will have to look at the equity in your property and income to make that determination.
If you are worried about losing your property in a bankruptcy, then you will need to be sure to file the correct bankruptcy. A common myth for Chapter 7 is that you will lose everything that you own. That is generally not the case. If you have property with little or no equity, then you will almost certainly not lose such property in a Chapter 7. However, if you do have property with a lot of equity, the Chapter 7 trustee can take the property to sell and pay your creditors. In this situation, instead of filing a Chapter 7 you can keep your property by filing a Chapter 13 bankruptcy.
One last major difference between Chapter 7 and Chapter 13 are income requirements. Bankruptcy law has an income test called The Means Test. The purpose of The Means Test is to determine if you are eligible to file Chapter 7 or not. The Means Test is a very long and complicated calculation based on six-months of your household income.
In a Chapter 7, you must pass The Means test to be able to file. If you fail The Means Test, the only option you have is to file a Chapter 13 and set up a payment plan to repay your unsecured creditors. The Means Test in a Chapter 13 plan does not affect whether or not you can file a Chapter 13. The Means Test is only used to calculate disposable income to see how much you might be able to pay unsecured creditors in your plan. Chapter 7 and Chapter 13 are bankruptcies that can be filed to help people in various types of situations. Your bankruptcy attorney will look at your particular situation and make recommendations about which chapter is best for you.
Attorney Steven A. Harris regularly blogs in the areas of family law, bankruptcy, and real estate closings on this website. He is always available in any of the firm’s offices or by phone anytime for a consultation. Mr. Harris tries to provide informative information to the public in easily digestible formats. Hopefully you enjoyed this article and feel free to supply any feedback. We appreciate our readers and love to hear from you!