Chapter 7 Bankruptcy (Liquidation)
Chapter 7 of the U.S. Bankruptcy Code governs the process of liquidation and is the most common form of bankruptcy in the United States. A chapter 7 case begins when a petition is filed with the bankruptcy court serving the area (in our case, Santa Barbara Bankruptcy Court. More information HERE). In addition to the court filing, you must submit the following items:
schedule of assets and liabilities
schedule of current income and expenditures
statement of financial affairs
schedule of executory contracts and unexpired leases
schedule of exempt property
In a Chapter 7 bankruptcy, you are allowed to keep certain exempt property. The Bankruptcy Code allows you to protect some property from the claims of creditors because it is exempt under federal bankruptcy law. Filing a petition under Chapter 7 "automatically stays" (stops) most collection actions against you and your property. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or telephone calls demanding payments. Between 20 and 40 days after the petition is filed, the court trustee will hold a meeting with your creditors. The bankruptcy trustee gathers and sells your non-exempt assets in a manner that maximizes the return to your creditors. The trustee then uses the proceeds to pay off your creditors. Please understand that the filing of Chapter 7 may result in the loss of a portion of your property.
One of the primary purposes of bankruptcy is to discharge certain debts to give individuals a fresh start. Keep in mind there are consequences of seeking a discharge through bankruptcy such as the negative effect on credit history, the effect of receiving a discharge, and the effect of reaffirming a debt. A chapter 7 bankruptcy stays on your credit report for 10 years from the date of filing. This contrasts with a chapter 13 bankruptcy, which stays on your credit report for 7 years from the date of filing. A bankruptcy filing on your credit report may make credit less available and/or terms less favorable ( high debt can have the same effect). You should check with a bankruptcy attorney to find out what assets are exempt from liquidation and if you do file bankruptcy, attempt to discharge as many debts as possible.
Chapter 13 Bankruptcy (Reorganization)
Chapter 13 of the U.S. Bankruptcy Code governs the process of financial reorganization and is supervised by a federal bankruptcy court. This chapter is also called a wage earner's plan. It enables individuals with regular income to create a written plan (must be filed within 15 days of bankruptcy filing) to repay all or part of their debts over a period of three to five years. The plan details all of the transactions and their durations that will occur during this time. Repayment according to the plan must begin within thirty to forty-five days after the case has started and typically consists of biweekly or monthly payments. These payments are made to a court trustee, who in turn distributes the funds to creditors according to the terms of the plan. There are three types of creditor claims: priority, secured and unsecured. Priority claims hold special status under bankruptcy law and include taxes and the cost of bankruptcy proceedings. Secured claims are for property where the creditor has the right take back the collateral used to secure the debt (i.e. car, house). Unsecured claims are the last to be paid and are not backed by collateral. During this period, creditors cannot attempt to collect on your previously incurred debt except through the bankruptcy court. In general, you get to keep your property, and your creditors end up with less money than they are owed. In no case may a plan provide for payments during a time period of more than five years.
Any individual is eligible for Chapter 13 relief as long as their unsecured debts are less than $360,475 and secured debts are less than $1,081,400. However, a corporation or partnership may not file for Chapter 13 bankruptcy. In addition, you must have received credit counseling from an approved credit counseling agency within the last 180 days.
A significant advantage of Chapter 13 bankruptcy over Chapter 7 is that it offers you the opportunity to save your home from foreclosure. By filing under Chapter 13, you can stop foreclosure proceedings and cure delinquent mortgage payments over time. The automatic stay stops the foreclosure proceeding as soon as you file the petition. Nevertheless, you may still lose your home if the mortgage company completes the foreclosure sale under state law before you file the petition or if you fail to make the regular mortgage payments that come due after the Chapter 13 filing.
If you have additional questions about bankruptcy, please contact a local bankruptcy attorney. A bankruptcy attorney can advise you on when the best time to file is, whether you qualify for a chapter 7 or need to file a chapter 13, ensure that all requirements are fulfilled so bankruptcy goes smoothly, and whether your assets will be safe if you file. With expanded requirements of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, filing bankruptcy is complicated.
DISCLAIMER: I am not a lawyer. This is not legal advice. Please seek counsel from a licensed bankruptcy attorney.