Which Type Of Bankruptcy Is Best For You?
There are two different bankruptcy procedures for individuals. These proceedings are known as Chapter 7 and Chapter 13. While you may be familiar with the term Chapter 11 from the news, that chapter applies to business owners only.
Prior to October of 2005, going through a personal bankruptcy was a fairly simple and painless process. It did ruin your credit but it also allowed for a more liberal discharging of debt. In 2005, the law changed and is designed to provide an incentive to people to file under Chapter 13 rather than Chapter 7. For people with a steady income, Chapter 13 allows them to keep some property like a house or a car that they would otherwise lose in a Chapter 7 filing. Chapter 13 is a court approved “pay back” plan that can run for as long as five years.
Chapter 7 is sometimes refered to as a straight bankruptcy. Basically Chapter 7 requires the liquidation of all but a few work related assets like a vehicle used in work or tools etc. All other property will be sold or given to debtors as payment. The chapter also places a limitation on the amount you can earn during this process. The intent of the law is to insure the debtor does not profit by not paying his debts.
Once you have filed for Chapter 7, you will not be able to file again for eight years. Chapter 13 on the other hand, has a waiting period of only two years between filings.
While there are some similarities in the types of debt that can be discharged through either Chapter 7 or 13, there will be some differences as well depending on the state where you file. Most unsecred debt, garnishments, foreclosure notices and collection calls can be discharged through bankruptcy. However, child support, alimony, fines, certain taxes and student loans cannot.
Unlike the liquidation proceedings in a Chapter 7, Chapter 13 is designed to allow the debtor to pay off all the debt over a period of time. However, the court must be satisfied with the pay back plan otherwise it can order that other property such as boats, cars etc be sold to insure that the debts are fully paid. Arriving at a reasonable pay back plan is essential if the debtor wishes to keep his property.
As part of the new law, persons seeking to file under either chapter have to have attended a government approved credit counseling course within six months of filing. The idea here is to try and solve the credit problem without taking legal action. The second major change just involves Chapter 7. Today you have to satisfy a “means test” to confirm your income does not exceed a certain amount. This amount will vary by state. You can find those limits here.
There are other strategies to settle your debt without going through bankruptcy. It all depends on your personal situation and what best makes sense for you and your family. Any decision to file for bankruptcy should not be made without consulting a qualified bankruptcy attorney.