This page explains general principles relating to complex legal matters. For the best course of action in your particular situation you should consult an attorney familiar with specific provisions of the law.
Bankruptcy should be the last debt relief option considered by the financially distressed. That said, if other options are considered and are not likely to work then a person with overwhelming debt is usually better off preparing for a bankruptcy filing from the start.
There are four common types of bankruptcy relief: Chapter 7, Chapter 11, Chapter 12, and Chapter 13. Each of these is described below.
The person who files a bankruptcy is called a “debtor.” If the debtor’s obligations are mostly consumer debts and the debtor’s income is above the state median income then rules kick in that may (a) prevent the debtor from using a particular bankruptcy chapter or (b) change the treatment of that debtor under a particular chapter.
In most bankruptcies the debtor’s goal is to obtain a “discharge” that wipes out debt. However, a discharge does not wipe out all types of debt (child support, for example). In addition, some debts are dischargeable under one type of bankruptcy but not another; and other debts are dischargeable if a certain period of time has gone by before the bankruptcy filing but not before (debts arising from timely filed income taxes, for example).
Before filing a bankruptcy the debtor must prepare a lot of paperwork, including a list of all of the debtor’s debts and assets. During this time a debtor may engage in exemption planning to protect assets.
The bankruptcy begins with the filing of a “petition.”
Chapter 7. A month or so after a debtor files a Chapter 7 bankruptcy the debtor meets with a Trustee. The Trustee’s primary goal is to determine whether the debtor has any assets that the Trustee can turn into cash to pay the debtor’s creditors. The law provides that certain property is exempt from the Trustee. In most cases all of the debtor’s assets are exempt and the debtor is allowed to keep all of the debtor’s property (subject to the payment of any mortgages or other liens). Unless a creditor objects (which rarely happens), a few months later the bankruptcy court issues a discharge. The debtor may not file another Chapter 7 petition for eight years. So it is important to be sure that a Chapter 7 bankruptcy is filed at the proper time.
Chapter 11. Designed for businesses, Chapter 11 can be used by individuals as well. However, Chapter 11 is a very expensive and complex proceeding. Accordingly, it is only appropriate in limited situations. The goal of a Chapter 11 debtor is to develop a workable plan to restructure – and, in many cases, reduce – the debtor’s debts. The debtor then submits the plan to the debtor’s creditors for a vote. If the creditors vote in favor of the plan then the debtor submits the plan to the bankruptcy judge for approval. An approved plan becomes the debtor’s new obligations to creditors.
Chapter 12. Only farmers can use Chapter 12 to adjust debts. In many respects, Chapter 12 is similar to Chapter 11. One difference is that creditors do not have an opportunity to vote on the debtor’s proposed plan. Another is that there are special tax benefits available for Chapter 12 debtors. A major drawback is that for the first three to five years after the Chapter 12 plan is approved the debtor must make payments through the Chapter 12 trustee, who charges a fee of up to 10% over and above the creditor payment amounts.
Chapter 13. Only individuals (not partnerships, corporations, or other entities) may file a Chapter 13 bankruptcy. At the beginning of the Chapter 13 case the debtor proposes a three to five year plan to pay creditors and begins making payments. Usually the plan does not pay all creditors in full. If the debtor makes all the payments the bankruptcy court issues a discharge to the debtor. Examples of circumstances in which debtors choose Chapter 13 over Chapter 7 include: (a) debtor filed a prior Chapter 7 within eight years, (b) debtor wants to stop a foreclosure and catch up on home mortgage payments, and (c) a particular debt is dischargeable in Chapter 13 but not Chapter 7.
Contact us for a debt relief consultation to determine the best course of action in your particular situation.
Freund Law Office is a debt relief agency. Among other things, we help people file for bankruptcy relief under the Bankruptcy Code.