Chapter 7- “Straight” Bankruptcy or Liquidation Bankruptcy
Chapter 7 Bankruptcy is best suited for individuals and companies with finical difficulties, who do not have the ability to pay their debts in any reasonable amount of time. Chapter 7 Bankruptcy is filed in an effort to resolve or extinguish the debts of the company or individual. Immediately following the filing of a Chapter 7 Bankruptcy the debtor (the individual or company filing the bankruptcy) is granted “relief” from their creditors. The automatic stay provisions of the Bankruptcy Code are invoked and prevents/prohibits creditors from pursuing the debtor at any time or place. This means that once these provisions go into effect creditors may not do the following:
- send bills
- make collection calls
- file lawsuits
- garnish wages
- levee income
- or take any other action to collect debts
For example, a judgment may not be taken against a debtor even though a lawsuit may have already been filed against the debtor.
A Chapter 7 Bankruptcy is typically filed for an individual or company who can no longer pay their bills as they are due because of loss of income due to
- layoff, job termination
- declining business or economic downturn
Incurred debts for individuals are dischargeable under Chapter 7 Bankruptcy; however businesses are not granted a discharge, instead creditors are prevented/prohibited from pursuing the debtor any further after the Bankruptcy has been filed.
Even if a Chapter 7 Bankruptcy is filed certain secure debts can be reaffirmed or extended through the Bankruptcy if it is the desire of the debtor to maintain or keep the item which is collateral for a loan or debt.
Generally the following types of Debts can be discharged in a Chapter 7 Bankruptcy Case:
- Installment loans
- Credit Card Debt
- Unsecured Debt (i.e.: personal loans, medical bills)
- Deficiency balances dues after a foreclosure or repossession
However there are certain types which may not be discharged which include:
- most taxes
- child support
- student loans
- court ordered fines
- debts obtained through fraud or deception
It should be noted that all assets and property as well as all debts and liabilities must be listed in the Bankruptcy Filing in accordance with the Bankruptcy Code. Creditors cannot request or require you to repay debts that have been discharged through a Bankruptcy, but under certain circumstances one may keep property that has been purchased subject to a security interest such as a home, motor vehicles or other personal items. An attorney should review and analyze your economic situation in order to determine if any alternatives are available. A Chapter 7 Bankruptcy filing remains on your credit record for a period of ten years. However an attorney can provide further information on reestablishing your credit.
Chapter 13 - Debt Consolidation
A Chapter 13 Bankruptcy is utilized for individuals with regular income who are temporarily unable to pay their debts, Chapter 13 Bankruptcy is not available for businesses. This type of filing is specifically designed for individuals who desire to pay their debts in installments over a 36 to 60 month period of time. In reality a Chapter 13 filing is a debt consolidation plan, which forces creditors to accept payment from “disposable” income over a period of time. The main reason for filing a Chapter 13 case is to stop action on the following procedures:
- foreclosure on real property
- repossession of motor vehicles and personal property
- salary liens or garnishment
- lawsuits or judgment
- harassing collection actions (phone calls or letters from creditors)
Upon the filing of a Chapter 13 case individuals are granted “relief” from their creditors. Creditors cannot continue contacting the debtor to demand payment, and they cannot take action to claim money or property from individuals.
Debts of all kinds can be included in a Chapter 13 Case including past due amounts for:
- Medical Bills
- Student Loans
- Child Support
- Credit Card Debt
- Motor Vehicle Loans
- Installment Loans
- Mortgage Payments
Ordinarily Chapter 13 filings and payment plans are developed for a period of three to five years. Creditors are paid a percentage of their claim based on the debtors “disposable” income that’s available. This development of a plan will be provided by an attorney which will be tailored to fit your individual situation. An individual may keep their property if it is paid for through the Chapter 13 plan. There are certain situations where a debtor may not have to pay all attorney’s fees in advance, you may be able to pay as part of the payment plan. A Chapter 13 Bankruptcy filing remains on an individuals credit for seven years.
Chapter 11 - Reorganization
A Chapter 11 Bankruptcy is designed for businesses and individuals with finical difficulty who do not have the ability to pay their obligations in a timely manner. There are certain distinctions between Individual Chapter 11 cases and business cases which will be explained to you by your attorney and tailored to your individual circumstances.
Typically a Chapter 11 filing provides protection for the debtor from creditors which prevents the destruction of the debtors business and/or property.
A plan of debt repayment is developed in the Chapter 11 case and is presented to the creditors who have the right to vote on such a plan after full disclosure of the debtor’s finical matters. A Chapter 11 is similar to a Chapter 13 filing but Chapter 11 typically deals with business debts and as such payment of a percentage of the debt is usually applied by the debtor.
Typically a business emerges from Bankruptcy upon the confirmation of the Plan of Reorganization, or the “Payment Plan”. However individuals do not recieve a discharge from their debts until they complete the payment plan. The payment plan is usually five years. Businesses do not receive a discharge but rather an injunction against the collection of debts is entered in the case and payments are distributed to creditors over the plan life which satifyies and completes the plan.
A Chapter 11 case is usually quite expensive and can consume a period of 12 to 24 months. Besides plan payments there are also many legal and accounting fees.
However it should be noted that there are limits on amounts of debt which can be discharged in a Chapter 13, such individuals with large amounts of debt can be forced into a Chapter 11. Your attorney will explain in more detail the requirements for a Chapter 11 filing and the ramifications of such.