Many people considering bankruptcy do not understand that there are different chapters under the U.S. Bankruptcy Code and that there are significant differences between them. Chapter 7 and Chapter 13 are the two primary bankruptcy options for relief of personal debt.
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Debt relief under U.S. bankruptcy codes are your right. There is little shame in it anymore because the economy has changed the financial landscape for many.
Before you file, you must complete a federal form called the 22A - or "the Means Test." This form looks at the type (secured vs. unsecured) of assets you have, the amount of your accumulated debt, your monthly income relative to the median of the state you live in, tax information and your total property and assets.
The biggest difference between the two forms of bankruptcy is the way that your debts and property are handled:
- In Chapter 7, most of a debtor's property is surrendered to a bankruptcy court trustee to liquidate. The proceeds are sold to help repay creditors. Any outstanding debt is then discharged and the debtor is no longer obligated to repay the loans or credit card companies. Chapter 7 has a fairly quick turnaround and all of a person's debt can be eliminated within a couple months’ time.
- In Chapter 13, the debtor retains his property and enters into a repayment plan that is set up between creditors and a bankruptcy court trustee. Unlike Chapter 7, the debt is not discharged; it is reorganized and repaid over a three- to five-year schedule.
- There are also different eligibility requirements for Chapter 7 and Chapter 13:
- To be eligible for Chapter 7, your income – in most cases – must fall below the state median. You must have few or no assets and/or have no surplus income after your monthly expenditures.
- With Chapter 13 bankruptcy, you must have the ability to repay some or all creditors. You cannot have more than approximately $1 million in secured debt or more than approximately $350,000 in unsecured debt. Chapter 13 can be used: to repay the IRS without a wage garnishment, to get caught up on house payments, and to get caught up on car payments.
There are key differences in the filing process for Chapter 7 and Chapter 13 bankruptcies.
Filing Chapter 7 bankruptcy requires less paperwork as it does not include the reorganization plan mandated by Chapter 13. A bankruptcy petition, the Means Test and an assortment of statements and lists (known as schedules) are filed electronically with the bankruptcy court. A judge and trustee are automatically assigned to your case.
The filing process automatically assigns a judge and trustee to your case. Approximately 30 days later, you must meet with your attorney and the trustee in what is commonly known as the creditors’ meeting. Your creditors are also notified of this meeting. Between the initial filing and within 44 days after the creditors’ meeting (if your debts are not primarily business debts), you must complete a Personal Financial Management Course.
In the event that you have non-exempt property, it will be turned over to the trustee to administer. Debts can then be discharged.
Filing Chapter 13 bankruptcy requires similar paperwork to Chapter 7, including filing of a petition, submission of schedules, statements, the Means Test and the Personal Financial Management Course. However, Chapter 13 also requires submission of a reorganization plan. It also takes more time to complete the process and pay off the debts: At least 36 months for someone with an income below the state median and at least 60 months for a person whose income is above the median.
Extreme hardships, such as health issues or job loss, can allow a petitioner to change the repayment plan on a temporary or permanent basis. This is handled case by case.
Help is Available
If you are considering filing either form of bankruptcy, talk to an attorney who is skilled and experienced in this practice area. If you try to go it alone, you risk making mistakes in the intricate paperwork that is required, and you may not represent yourself as ably as a professional third party.
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Alice Bower, Attorney at Law, is a personal bankruptcy lawyer practicing in Fort Worth, Arlington, Irving, North Richland Hills, Grapevine, Colleyville, Mansfield, Burleson, Grand Prairie and Bedford.