Chapter 7, also referred to as a "Liquidation Bankruptcy," is designed to provide a Fresh Start for individuals who are so overwhelmed with debts that they are unable to repay all of their creditors without significant hardship. While most debtors in Chapter 7 are able to retain all of their assets through properly use of bankruptcy exemptions, Chapter 7 does require that non-exempt assets of the debtor be liquidated by a court appointed Trustee for the benefit of creditors.
A Chapter 7 Discharge Order eliminates most of the debtor's personal debts, to the extent that such debts are not reaffirmed. Reaffirmation agreements may be entered into which allow the Debtor to continue to be liable for secured debts and to retain the assets securing such debts (such as vehicles or homes encumbered by liens for which the debtor makes regular payments).
Not everyone is eligible to file for Bankruptcy under Chapter 7. There are several eligibility requirements that must be met under the Bankruptcy Code. However, despite many rumors, many people who would benefit from it are actually eligible to file for Bankruptcy protection under Chapter 7.
A typical Chapter 7 Bankruptcy normally takes approximately three to four months from the date of filing until the date of Discharge Order, although some cases may take longer. Once the case is filed with the federal Bankruptcy Court, an "Automatic Stay" goes into effect, which prohibits creditors from contacting the debtor or taking any other action to collect from the debtor without approval from the Bankruptcy Court.
Chapter 7 Bankruptcy is a real option for most debtors who have average or lower than average annual incomes and whose overwhelming debts are comprised primarily of the following:
Credit Card Balances
Most Civil Court Judgments
Chapter 13 of the United States Bankruptcy Code, also commonly referred to as a "Reorganization Bankruptcy," is designed to allow debtors to reorganize their finances in order to ultimately repay at least a portion of their outstanding debts.
A Chapter 13 Bankruptcy involves a Repayment Plan that includes payment of all past due and ongoing payments owed to secured creditors for the assets retained by the Debtor. Unsecured creditors usually receive at least a small portion of the debts owed to them, as well. While there is no asset liquidation in Chapter 13, the non-exempt equity value of a Debtor's assets must be contributed to non-priority unsecured creditors through the repayment plan amount.
The Repayment Plan lasts for three to five years and payments are made to a Bankruptcy Court assigned Chapter 13 Bankruptcy Trustee, usually through a withholding of the Debtor's wages equal to their disposable monthly income.
A Chapter 13 Debtor must have a regular source of income - at least enough to feasibly facilitate the Repayment Plan, in addition to the Debtor's ongoing monthly living expenses.
For Debtors needing bankruptcy protection, Chapter 13 is generally most effective when one or more of the following conditions apply:
1) The Debtor wishes to prevent a foreclosure or repossession of an asset securing a debt due to arrearages that could feasibly be cured within a reasonable Repayment Plan with the elimination of or reduction in unsecured debt obligations.
2) The Debtor has non-exempt equity value in assets that would be liquidated in Chapter 7 Bankruptcy, but for which they can feasibly pay unsecured creditors an amount equal to the non-exempt equity value through a Chapter 13 Repayment Plan.
3) The Debtor is ineligible for Chapter 7, and still requires a bankruptcy solution to their financial problems.