Chapter 7 Liquidation

Chapter 7 bankruptcy or "straight bankruptcy" is the most popular form of bankruptcy because it allows the debtor to "wipe the slate clean" and start all over. This code is available to individuals, couples, corporations and partnerships. Discharge normally occurs within 4-6 months after filing.

Non-exempt assets will go under the care of a trustee who liquidates them to satisfy creditors in order of their secured interests. Any wages a debtor earns is off limits to creditors who had a vested interest on the date of filing.

This code is generally used by those who lack sufficient income to cover outstanding debts after taking care of basic necessities, and who have no hope of ever repaying their creditors. There are certain obligations that are not dischargeable, for example:

·        Alimony and child support

·        Back taxes under 3 years old and student loans

·        Recently made purchases for substantial amounts

·        Property executed contracts involving titles or liens

Before considering chapter 7 you should take an inventory of the types of debt owed. This will give you a better idea if filing will give you the relief you seek.

Who should consider chapter 7.  

* If court action by creditors is imminent, filing stays all collection proceeding while in court.

Downsides
Ruins your credit. If you have a cosigner, they will still be responsible for the debt you discharge. Pay attorneys, court and filing fees upfront.

Alternatives
If you can't discharge enough of your debts or have to sacrifice too much property you may want to consider chapter 13 or a credit counseling / debt consolidation repayment plan.

Chapter 13 Bankruptcy

Wage Earners Plan

Chapter 13 bankruptcy is the reorganization of an individual consumer's debt with a new payment schedule. If you have too much disposable income to qualify for chapter 7 or have assets you want to protect, you may want to consider this code. Your debts must be below a certain level and you must have steady income.

With this chapter the debtor reaffirms to pay all or a part of their debt. The amount of repayment can range from 10% to 100% depending on the debtor?s income and the composition of amount owed. This code allows the debtor to restructure their payments and set up a new payment schedule (usually 3-5 years) that is more manageable.

For an individual to qualify under this code unsecured debt may not exceed $250,000 and secured debts $750,000. Payments are made to secure creditors first to the extent of their secured interest and priority. Non priority creditors may be partially paid- credit cards and some taxes etc. In general, creditor approval is not required. Secured creditors can object to the repayment plan however, the court can force acceptance. (Cramdown)

This form of bankruptcy is used when the petitioner has property they want to keep like a mortgage that is about to be foreclosed on and other non-exempt assets that would be liquidated under chapter 7. Filing under this code will also halt all collection and foreclosure proceedings (including IRS) and allow the debtor to catch up on their payments and reinstate their original agreement. Your payments will be made to a Trustee who will disburse them in a manner called for in the court-approved plan. During this time the Trustee will have control over your (personal) finances and any credit-related matters will have to be cleared through him.

Who should consider this chapter?
* If you are behind on your mortgage and need to catch up or if you owe the IRS.

* If the assets you want to protect would be liquidated under a chapter 7 and your disposable income is to high to qualify for a chapter 7.

* If you need relief from collection proceedings or if you wish keep your obligation to pay your creditors and need some breathing room.

* If you wish to leave the option of filing a chapter 7 at some time in the future. If you are a farmer who does not qualify for chapter 12 and have debt unrelated to farming.

* You filed chapter 7 sometime in the past 6 years. You have a co-signer. If you could pay your debts within 3-5 years.

Downside of Chapter 13
Chapter 13 ruins your credit. It will remain on your credit report for up to 10 years. It will also cost you more for any credit you do get in the form of higher interest rates. The Trustee appointed to oversee the completion of your filing may charge up to 8% of the amount filed on. You will have to pay attorneys, court and filing fees up front.

Alternatives
If your debts are primarily unsecured debt, (credit cards, medical bills, unsecured loans etc.) you may want to consider debt restructuring through a credit counseling or debt management agency who specializes in consolidation of unsecured debt.

Chapter 11 Bankruptcy

Small Business Debtor

Individuals may file under this chapter but it is used primarily for business debt. (Sole proprietor not included) A Small Business Debtor is one whose debts exceeds the limits of chapter 13 (unsecured $250,000 and secured $750,000) and has an aggregate non-contingent secured and unsecured debts of $2,000,000.00 or less. (excluding one who owns or operates real estate) If qualified the debtor can be fast-tracked and treated differently than a large corporation.

This chapter allows the debtor (business) to continue normal business activities while reorganizing (Like chapter 13) its finances so that it may pay its employees, reduce obligations to its creditors and produce a return for its stock holders. During this chapter the debtor retains possession of assets and continues operation. Plan may last up to 6 years.

Keep in mind, bankruptcy doesn't come without some trade offs. Often times, you see advertisements promoting bankruptcy as "fast and easy", but that generally applies to the lawyer who files on your behalf, not you. Your lawyer isn't the one who has to live with the stigma of filing for up to 7-10 years.

Filing puts the world on notice about your personal financial affairs. Since its a civil court proceeding, it becomes a matter of public record. In some cases, (chapter 13) even your employer can be involved because this chapter requires deductions from you paycheck.

Bankruptcy also stays on your credit report for up to 10 years and can hinder your ability to get a job, establish new credit, get insurance and even a place to live. You will also have to pay court, attorney and filing fees up front. Furthermore, you will lose control over your finances since a Trustee will be appointed to oversee the completion of your filing. Trustees don't come cheap either. They charge an average of 8% to oversee the successful discharge of your bankruptcy petition.

(Example: $25,000 (total debt) x .08 (Trustee Fee) = $2,000 plus attorney, court and filing fees)

This in addition to the fact that filing doesn't necessarily get you out of all your obligations, bankruptcy may not be that end-all solution that its portrayed to be.

Other Alternatives

* You can simply walk away? If you have no assets, creditor can't attach any property. Unless a creditor has a substantial amount invested in you and/or your state prohibits garnishment of wages, you probably don't have anything to worry about. However, you should be prepared for collection attempts via phone and mail, and threats of lawsuits if you decide to go this route. This is not a recommended way to deal with your obligations.

* You can try to deal with the creditors yourself and work out a new payment plan.

* You can try to budget your expenses and live a more frugal lifestyle, or take on a second job to bring in more income.

* You can contact one of the many debt consolidation / credit counseling services that specialize in helping consumer with credit problems