There are two main types of bankruptcy cases generally used by most consumers. These are referred to by their chapter number in the Bankruptcy Code. Determining which type of bankruptcy to file is based upon numerous factors and analysis, including but not limited to amount of income, amount of assets, amount of debts, types of arrearages and goals of the debtor.
Chapter 7: This is a liquidating bankruptcy, and it is the most common bankruptcy case. In return for having debts discharged, the debtor must turn over to the bankruptcy trustee all property except for certain assets which applicable state or federal law allows the debtor to keep as exempt. The trustee sells the property and distributes the proceeds to the creditors according to priorities established by law. Very often, there is not enough money to pay for anything more than the costs of administration, and the creditors will receive nothing. The principal advantage of Chapter 7 is that the debtor emerges from bankruptcy without any future obligations on his or her discharged debts.
Chapter 13: This case is often used by individuals who want to catch up past-due mortgage or car loan payments and keep their assets. In Chapter 13, the debtor must propose in good faith to pay all or part of the debts from future income over a period of time ranging from three to five years. If the court approves the plan of payment, the debts may be settled in this manner, even if the creditors are not willing to go along with the plan. If the debtor makes the payments as required, he or she will not have to surrender property to the trustee.
Using Chapter 13 can be strategic for a debtor as compared to a Chapter 7 bankruptcy. Some of the debts not discharged in Chapter 7 bankruptcy will be discharged once the debtor completes a Chapter 13 plan. Also, the debtor can pay most non-dischargeable federal taxes over the term of the Chapter 13 plan. However, Chapter 13 can only be used by an individual debtor and only if the total debts owed are less than certain limits for secured and unsecured debts. An individual engaged in business not as a corporation might use Chapter 13 to pay debts or settle them over a period of time while he or she continues to own and operate the business. Generally, businesses and very high-debt or high-asset individuals may need to look to other Chapters of the bankruptcy code for protection.
Generally, an individual does not necessarily lose their home or car in a bankruptcy. However, bankruptcy eliminates debt and does not generally affect creditors’ liens on collateral, such as a mortgage on a home or a car loan. Judgment liens and some liens on personal property, called non-purchase money security interests, may be avoided if they are liens on exempt property. If a debtor wants to keep his or her house, the debtor must usually continue payments on the mortgage. If the debtor wants to keep a car which is liened, he or she must likewise continue the payments. A debtor facing foreclosure on his or her home may use Chapter 13 to repay past-due payments and other costs while making the regular mortgage payments to keep the home. In a Chapter 7 liquidating bankruptcy, certain property can be redeemed from a lien by an appropriate proceeding in the bankruptcy, which would require paying to the lien holder the market value of the property.
If a creditor or the trustee objects to a bankruptcy, a debtor may be denied a discharge and continue to owe the debts as if the bankruptcy had never been filed. Some of the reasons for being denied a discharge are fraudulent transfer of an asset to keep it away from creditors or the bankruptcy trustee, concealment of assets, or disobeying or making a false statement to the court. Such acts may also constitute federal crimes for which the debtor can be fined or imprisoned.
Certain types of debts, such as child support, alimony, some federal income taxes and all employer withholding taxes, cannot be discharged in bankruptcy. Generally, student loans cannot be discharged. The debtor’s wrongful conduct may make some debts non-dischargeable in a liquidation bankruptcy, such as incurring credit card charges when the debtor had no intent or ability to repay, or obtaining loans using false financial information.