Personal Bankruptcy

Personal bankruptcies can be filed under chapter 7 or chapter 13 of the Bankruptcy Code. A chapter 7 bankruptcy is also known as debt liquidation. It wipes out all of your debts that the Bankruptcy Code allows to be discharged. A chapter 13 bankruptcy is a court-supervised debt repayment plan. Over a three to five year period, you repay your secured creditors in full and pay your unsecured creditors as much as you can afford.

Differences Between Chapter 7 and Chapter 13

Not everyone is eligible to file a chapter 7 bankruptcy, and not everyone can file a chapter 13 bankruptcy. Only debtors who can pass a "means test" are eligible to file under chapter 7, while only debtors with a regular income that is sufficient to allow them to make plan payments are eligible to file under chapter 13.

A chapter 7 bankruptcy allows a bankruptcy trustee to sell all of the debtor’s property that is not "exempt." Many people only own exempt property that cannot be sold to satisfy their creditors. A chapter 7 bankruptcy can be advantageous for debtors who only own exempt property and who are not at risk of losing a house to foreclosure or secured property to repossession. They can rid themselves of debt and begin a fresh start immediately without making the payments required by a chapter 13 bankruptcy.

On the other hand, there are certain benefits of a chapter 13 plan that a chapter 7 bankruptcy does not provide.

  • Dealing with nondischargeable debt. Certain debts, like alimony and child support arrearages, can never be discharged, while other debts, including student loans and most tax delinquencies, can rarely be discharged. Some kinds of nondischargeable debt, including student loans, can nonetheless be included in a chapter 13 plan. The loans will not be discharged when you finish making your plan payments, but while the plan is in effect, you may be able to make reduced payments and you won’t be bothered by creditors seeking to collect those debts.

  • Avoiding foreclosure. If you are behind on your mortgage payments, your options with a chapter 7 bankruptcy will be limited. Unless you can make up the delinquent payments and negotiate a reaffirmation of the mortgage loan with your lender before you file a chapter 7 bankruptcy, your lender will eventually be able to proceed with a foreclosure after you file your chapter 7 petition. If you file a chapter 13 petition, however, your lender will not be able to foreclose your mortgage loan. You’ll need to make your usual mortgage payments when they come due, but a chapter 13 plan allows you to make up your delinquent payments during the three to five years that the plan remains in effect. As long as the Bankruptcy Court confirms the plan, your lender’s agreement is not needed.

  • Avoiding repossession. A chapter 7 bankruptcy will not prevent repossession of your vehicle. Your options are to reaffirm the loan (if you can), to pay your creditor the current value of the vehicle in a lump sum payment, or to surrender the vehicle. A chapter 13 bankruptcy allows you to continue using your vehicle while making up delinquent payments over the lifetime of your payment plan.

  • Keeping exempt property. In a chapter 7 bankruptcy, any property you have that is not "exempt" can be sold by the bankruptcy trustee and the proceeds used to pay your creditors. In a chapter 13 bankruptcy, you keep all your property, even if it is not exempt.

  • Reducing secured debts. In a chapter 7 plan, you generally lose your secured property unless you can reaffirm the debt or pay the debtor the current value of the secured property. In a chapter 13 plan, you might also be able to pay the debtor the current value of the secured property rather than the balance that you owe, but you can do so over the three to five years that your plan is in effect. Whether you can take advantage of this "cram down" provision depends upon the kind of property that you gave as collateral and how recently you made the loan. You should consult your bankruptcy attorney to find out whether you can take advantage of the "cram down" benefits of a chapter 13 plan.