Generally, bankruptcy can be defined as a legal procedure created for the purpose of settling a debtor’s financial affairs. However, the goals of a bankruptcy, regardless of the chapter, are to settle any and all competing claims between creditors and giving the debtor a financial fresh start upon the discharge of their debt. The most important thing for a bankruptcy petitioner to understand is which of the applicable chapters would be better suited for their needs; moreover, they need an understanding of the rights and protections that are afforded to them from the moment of filing all the way through the discharge.
A Chapter 7 bankruptcy, also known as a liquidation, allows for the complete discharge and/or elimination of certain types of unsecured debts, such as credit cards, medical bills, and some personal loans.
A Chapter 13 bankruptcy, also known as a reorganization, allows an individual debtor the ability to remain with their assets by agreeing to a repayment plan, consisting of monthly payments for a duration of three to five years, for the benefit of their creditors.
A Chapter 7 bankruptcy, also known as a liquidation, allows for the complete discharge and/or elimination of certain types of unsecured debts, such as credit cards, medical bills, and some personal loans. Although it may be also referred to as a “liquidation,” debtors are allowed to retain certain assets that may be protected by either a federal exemption or a state exemption.
To determine if an individual qualifies for a Chapter 7, the question to be answered is whether the debtor has the means to pay a portion of their unsecured debts over time, after all factors are applied to the debtor’s finances, via the “Means Test.”
In the event that an individual has the “means” to pay their creditors, then the debtor does not qualify for Chapter 7, and if they wish to pursue Bankruptcy, they will be required to file under a different chapter, typically Chapter 13 (see below for Chapter 13 description).
A Chapter 13 bankruptcy, also known as a reorganization, allows an individual debtor the ability to remain with their assets by agreeing to a repayment plan, consisting of monthly payments for a duration of three to five years, for the benefit of their creditors.
This Chapter is often the default Chapter for those individuals who do not qualify to file a Chapter 7 due to their income level.
Immediately after filing a Petition seeking Chapter 13 relief, a debtor must hastily file a proposed repayment plan which outlines the proposed payments required to maintain secured debts, like a home mortgage and car loan, while also curing any and all arrears on these debts. In addition, the plan must include provisions to pay a portion of, if not all, unsecured debts such as credit cards and medical bills.
After filing the proposed repayment plan, the Court must approve the plan, and once approved, creditors must choose to accept the terms of the payment. However, if the Court rejects the proposed repayment plan, the debtor still has the ability to make changes which cure the objections and concerns of the creditors and the Court.
Once the repayment plan has been approved by all parties, the payments must be made to the Chapter 13 trustee, who will then pay the creditors.