What is Bankruptcy?
This article will explain the basics of both Chapter 7 and Chapter 13 bankruptcy.
Bankruptcy is a generalized term for a federal court procedure that helps consumers and businesses get rid of their debts and repay their creditors. If you can prove that you are entitled to it, the bankruptcy court will protect you during your bankruptcy proceeding. In general, bankruptcies can be categorized into two types -- "liquidations" and "reorganizations."
Among the different types of bankruptcies, Chapter 7 and Chapter 13 proceedings are the most common for individuals and businesses. Chapter 7 bankruptcies normally fall in the liquidation category. This means that if you own property, it could be taken and sold in the process of liquidation in order to pay back your debts. Conversely, Chapter 13 bankruptcies generally fall under the reorganization category, meaning that you will probably be able to keep your property, but you must submit and stick to a plan that will allow you to repay some or all of your debts within three to give years.
Both individuals and businesses are allowed to file for Chapter 7 bankruptcy. If an individual files such a bankruptcy, the bankruptcy definition is a consumer Chapter 7 bankruptcy. If it is filed by a business, the bankruptcy definition is a business Chapter 7 bankruptcy. These proceedings will typically last between three and six months.
Liquidation of property -- In a Chapter 7 bankruptcy proceeding, some of your property may be seized and sold to pay off some or all of your debts. However, as a benefit of this type of bankruptcy proceeding, any unsecured debts (debts that are not guaranteed by collateral) will be wiped out. In addition, there are certain types of property that cannot be sold in order to pay off your debts. This property is defined by federal law and include things like the furniture in your home, you car and your clothes. Many of the people that file for Chapter 7 bankruptcy are surprised to learn just how much property they get to keep.
Secured debt -- Secured debts are treated differently than unsecured debts in a Chapter 7 bankruptcy proceeding. In a Chapter 7 bankruptcy proceeding, you (the debtor) have to make a choice between allowing the creditor to repossess the property that secures the debt, continuing to make payments on your debt to the creditor, or paying the creditor a sum equal to the replacement value of the property that secures the debt. In addition, some types of secured debts can be wiped out during a Chapter 7 bankruptcy proceeding.
Chapter 7 Eligibility -- Before you can file for Chapter 7 bankruptcy, you must be able to show that you are eligible to file for Chapter 7. To be eligible for Chapter 7, you cannot make enough money (minus certain expenses and monthly debt payments) to be able to fund a Chapter 13 bankruptcy repayment plan. There are other requirements to be eligible to file for Chapter7 bankruptcy.
Debts that will not be wiped out by Chapter 7 bankruptcy -- There are certain types of debts that cannot be taken care of through a Chapter 7 bankruptcy proceeding. For example, while credit card debt, unsecured loans, and other debts can be forgiven in Chapter 7, things like child support, taxes that are due, and alimony payments cannot be wiped out. For more debts that will remain after a Chapter 7 bankruptcy proceeding, see Debts that Remain After a Chapter 7 Discharge.
Also known as the "wage earner" bankruptcy proceeding, only people with a reliable source of income are allowed to file for Chapter 13 bankruptcy.
Paying off your debt -- When you go to file your Chapter 13 bankruptcy in federal court, you must be willing to work with the court to come up with a repayment plan, and, even more so, stick with the plan over the next three to five years. The amount that you will need to pay is based upon your income, how much debt you owe, and how much the creditors of your unsecured loans would have received if you had filed under Chapter 7 instead of Chapter 13.
Limits on debt -- In order to be eligible to file for Chapter 13 bankruptcy, you must be able to show that your debt is under the limits for filing. As of September, 2009, the limit on secured debt was $1,010,650 and the limit on unsecured debt was $336,900. If you have more than either of these amounts, you may not be able to file for Chapter 13 bankruptcy protection.
Repaying secured debts -- Chapter 13 bankruptcy may allow you to repay secured debts, even if you are behind on payments, without having the property that secures the debt be repossessed. You may be able to put your past due payments into your debt repayment plan, and pay them off over a period of years.
Other forms of Reorganization Bankruptcy
There are two other types of reorganization bankruptcy in addition to Chapter 13. These are Chapter 11 and Chapter 12.
Chapter 11 bankruptcy proceedings are normally used by struggling businesses as a way to get their affairs in order and pay off their debts. In addition, some individuals also file for Chapter 11 bankruptcy when they are not eligible for Chapter 13 bankruptcy or own large amounts of non-exempt property (like several homes). However, Chapter 11 can be much more expensive and time consuming when compared to Chapter 13, and you will probably need to speak to a lawyer to decide whether Chapter 11 is right for you.
Chapter 12 bankruptcy is very much like Chapter 13 bankruptcy, except that it is only available to people that have at least 80% of their debts arising from a family farm. Chapter 12 bankruptcy was put in place due to struggling farmers that had many debts, but too high of an income to qualify for Chapter 13 bankruptcy, and not enough time to file for Chapter 11 bankruptcy.