Deciding to File Bankruptcy: Chapter 7, Chapter 13 and Other Notes

From Page 1: Considerations before Filing Bankruptcy

These are some of the things you should consider before deciding for or against filing for bankruptcy. But what can you expect if you do decide to file? A bankruptcy case is commenced when one files a "petition." And again, once the petition is filed, the "automatic stay" goes into effect which stops or "stays" collection actions against you. When you file your petition, you will also file "schedules" in which you set forth your personal information and your debts, your income, and the nature and extent of your possessions and assets. Your assets, minus some “exemptions,” constitutes your bankruptcy "estate." The estate is administered by a trustee. The trustee will meet with you and your attorney at the "341(a)" hearing to establish your identity and verify facts set forth in your petition and schedules, and to make further inquiries if warranted.

Secured vs. Unsecured Debt

It’s concern about your debt that has prompted you to read this far, so let’s talk about debt a bit. Your debts will fall into two general categories: "secured" and "unsecured." "Secured" creditors hold a lien on collateral. For example, an auto lender holds a lien on your car until you pay the loan off – that auto lender is a secured creditor and, in your bankruptcy case, has a secured claim in the amount you owe on your car. The mortgage on your home works the same way. "Unsecured" debts are those not secured by collateral, such as most credit card debt, and they are dischargeable to the extent that there is no disbursement to unsecured creditors through the bankruptcy case and to the extent that the debt was not incurred in violation of the Bankruptcy Code or is not exempted from discharge.

This is all generally applicable whether you file your petition under Chapter 7 ("straight" or "liquidation" bankruptcy), Chapter 13 (reorganization/repayment plan), or in rare cases, Chapter 11 (business reorganization, or for individual debtors whose income is too great to qualify for Chapter 13) or Chapter 12 (if you qualify as a family farmer or fisherman). Most individuals with mostly consumer debt will file under either Chapter 7 or Chapter 13.

The Means Test and Chapter 7 Eligibility

If you file your petition under Chapter 7, you have passed the "means test" (an evaluation of your debt and your income and family size in relation to the median income for your state). You can expect to receive a "discharge" of unsecured debt within four to six months from filing, barring complications, and then your case will close, giving you your fresh start. Be aware however that certain debts such as most taxes, student loans, family support obligations, and debts arising from certain criminal behavior set forth in the Bankruptcy Code are "nondischargeable" and you will remain responsible for those debts after your bankruptcy case closes. Also, to the extent your “estate” (your assets and possessions) exceeds your allowable “exemptions” (statutory means of exempting assets/possessions from the estate), the Chapter 7 trustee may liquidate (sell) and distribute that portion of your estate to your creditors. This can be problematic if, for example, you have equity in your home or car. Your attorney can advise you further if this is the case, and if you want to retain possessions that are non-exempt and in which you have equity, Chapter 7 may not be right for you.

Statement of Intention Under Chapter 7

Soon after filing your Chapter 7 petition you will file a "statement of intention" with regard to the treatment of your secured creditors. The statement of intention serves to notify these creditors of whether you intend to retain the collateral securing their claims, or whether you intend to surrender that collateral. For example, if you own a car but are still making payments on the loan, you may wish to retain your car, even though you could surrender it and have the remaining loan balance discharged. If you can afford to do so and the creditor agrees, you can enter into a "reaffirmation agreement" and "reaffirm" that car loan, and keep the car. You may be able to "redeem" that car instead. Please see the article, Keep your car – "redemption" in a Chapter 7 bankruptcy filing.

Chapter 13 Repayment Plan

If instead of filing a Chapter 7 petition you have filed your petition under Chapter 13, you have also filed a proposed repayment "plan" lasting three or five years, and commence making monthly plan payments to the trustee, who will in turn make distributions to your creditors in order of priority as set forth in that plan. When all plan payments have been made, your Chapter 13 plan is completed and you will receive a discharge as to that portion of unsecured debt which was not be paid through your plan.

Which is Better? Chapter 7 vs. Chapter 13

These are the bare basics. As you might imagine, there is much to consider in determining whether Chapter 7 or Chapter 13 filing is appropriate for you. For example, we mentioned before that a Chapter 7 debtor must pass the "means test." This test is designed to ensure that there is no abuse of the bankruptcy process by determining whether an individual contemplating filing a Chapter 7 petition has enough income to fund a feasible Chapter 13 plan and repay some of his unsecured creditors. So, your income may determine whether Chapter 7 or Chapter 13 is appropriate, but consider also that filing under Chapter 13 has some advantages depending upon your individual situation. For example, if you are behind on your loan or lease or mortgage payments, the "curing" of those arrears can take place over time through your Chapter 13 plan. Also, some secured creditors, like your auto loan provider, are subject to "cram down". This can be used to Keep Your Car and Lower Your Payment when you file under chapter 13. And, if you own your home but are "under water," meaning that what you owe on your home exceeds the current market value of the home, then under certain circumstances you may be able to "strip off" a second mortgage and that debt will be discharged as unsecured. Your attorney can tell you more about this.

Before we conclude, please take note of this important caveat: this article is not legal advice, nor is it intended to be legal advice. The purpose of this article is merely to introduce you to some basic bankruptcy concepts so that you can have an informed discussion about your options with your attorney. Best of luck to you.