Certain basic concepts apply under both Chapter 7 and Chapter 13. The case is commenced by filing a petition with the bankruptcy court. This petition must list all of your assets, liabilities and other information required under the bankruptcy code. You cannot pick and choose which creditors to include on the petition; but that doesn't mean you cannot keep your home, vehicle, or personal possessions. The filing of a bankruptcy petition invokes what is known as an "automatic stay." This "automatic stay" is a notice to all your creditors and immediately prevents them from doing anything further to compel collection of a debt. Therefore, the harassing calls, garnishments, lawsuits, foreclosures, repossessions, and utility shut-offs will stop. The stay is designed to give you time to sort out your affairs free from creditor pressure. With the recent changes in bankruptcy law, the courts closely scrutinize the financial transactions of debtors so remember that bankruptcy relief is not always guaranteed.
Chapter 7: Liquidation
Chapter 7 is designed for debtors in financial difficulty who do not have the ability to pay their existing debts. Debtors whose debts are primarily consumer debts are subject to a “means test” designed to determine whether the case should be permitted to proceed under chapter 7. If your income is greater than the median income for your state of residence and family size, creditors or the trustee’s office may have the right to file a motion requesting that your case be dismissed as an abuse of chapter 7. Therefore, it is necessary to analyze your income and expenses and determine if a Chapter 7 or Chapter 13 should be filed.
Under chapter 7, you may claim certain of your property as exempt under governing law. A trustee may have the right to take possession of and sell the remaining property that is not exempt and use the sale proceeds to pay your creditors and other expenses. It is important to maximize the exemptions you are entitled to claim.
The purpose of filing a chapter 7 case is to obtain a discharge of your existing debts. If, however, you are found to have committed certain kinds of improper conduct described in the Bankruptcy Code, the court may deny your discharge and, if it does, the purpose for which you filed the bankruptcy case will be defeated.
Even if you receive a chapter 7 discharge, certain type of debts are by law not dischargeable, such as most tax debts and student loan debts; debts incurred to pay nondischargeable taxes; domestic support and property settlement obligations; most fines, penalties, forfeitures, and criminal restitution obligations; debts which are not properly listed in your bankruptcy papers; and debts for death or personal injury caused by operating a motor vehicle, vessel, or aircraft while intoxicated from alcohol or drugs. Also, if a creditor can prove that a debt arose from fraud, breach of fiduciary duty, or theft, or from a willful and malicious injury, the bankruptcy court may determine that the debt is not discharged.
Chapter 13: Repayment of All or Part of the Debts of an Individual with Regular Income
Chapter 13 is designed for individuals with regular income who would like to pay part of their debts in installments over a 3 to 5 year period, or those who do not otherwise qualify for a Chapter 7. To be eligible for chapter 13 your debts must not exceed the dollar amounts set forth in the Bankruptcy Code.
Under chapter 13, you must file with the court a plan to repay your creditors all or part of the money that you owe them, using your future earnings. The period allowed by the court to repay your debts may be three years or as long as five years, depending upon your income and other factors. The court must approve your plan before it can take effect.
After completing the payments under your plan, all of your debts will be discharged except nondischargeable debts such as debts for domestic support obligations; most student loans; certain taxes; most criminal fines and restitution obligations; debts which are not properly listed in your bankruptcy papers; debts for acts that caused death or personal injury; debts incurred after filing for bankruptcy, and long term debts that are secured by valid mortgages or liens.
Chapter 11: Reorganization
Chapter 11 is designed for the reorganization of a business but is also available to consumer debtors. Its provisions are quite complicated, and it is expensive.
Chapter 12: Family Farmer or Fisherman
Chapter 12 is designed to permit family farmers and fishermen to repay their debts over a period of time from future earnings and is similar to chapter 13. The eligibility requirements are restrictive, limiting its use to those whose income arises primarily from a family-owned farm or commercial fishing operation.