Chapter 7 Bankruptcy:
When you desire to discharge your unsecured debt (credit card debt, personal loans, medical debt, etc.) and get a “fresh start” with minimal to no remaining debt, you want to file a Chapter #7 Bankruptcy in the United States District Court. This means you will petition the court for debt relief meaning debt discharge so that your creditors will never again be able to come after you for payment. Some debts are not dischargeable such as some tax debt, some kinds of student loans, etc.
When your debt is discharged you are allowed to keep some of your property, both real and personal, but you may not be able to hold onto all of your property. For example, you cannot discharge all your unsecured debt and keep the personal property items of significant value such as a Harley, valuable art or collectibles, or other items or ‘toys’ of value. You can keep your home if your net equity does not exceed the cutoff set by the Bankruptcy Court and you can keep your car if its value is within the set limits. You can keep personal household items, some jewelry, your retirement accounts. You have to disclose to the Bankruptcy Court in your Chapter #7 Petition ALL of your debt and ALL of your assets.
In order to qualify for a Chapter #7 Bankruptcy, you must pass what is known as the “Means Test.” This is a standardized test which, in essence, evaluates your gross and net income for the six (6) months prior to the filing of your Petition and, as well, your minimal basic necessary and some extra ordinary living expenses. If you pass the Means Test this means that you do not earn too much money to file a Chapter #7 Bankruptcy and you can proceed to file. If you fail the Means Test this means that you possibly earn too much money to qualify to file. More clearly put: if you earn too much money and do not qualify, the rationale is that you can afford to pay your creditors at least some or all of the debt. If you do not qualify for a Chapter #7 Bankruptcy, you have the option of filing anyway and arguing against the presumption that you do not qualify or not filing at all or delaying your filing until your income over the six (6) months prior to filing is less assuming you anticipate less in the future. You also have the option of filing a Chapter #13 Bankruptcy which is a reorganization plan and is discussed herein.
Chapter 13 Bankruptcy
If you fail the “Means Test” and do not qualify for a Chapter #7 Bankruptcy filing (a full discharge of your unsecured debt) then filing a Chapter #13 Bankruptcy may be another option. In a Chapter #13 Bankruptcy you do NOT instantly discharge your unsecured debt but rather you ‘reorganize’ your debt and ultimately over time, pay some of your debt and discharge some of your debt. In a Chapter #13 filing, you will disclose ALL of your assets and ALL of your debt and you will submit to the Bankruptcy Trustee for approval a repayment plan. This repayment plan will provide for a monthly payment, sometimes quite nominal, to the Trustee for a period of up to three (3) or five (5) years (depending on your income and the amount of debt) and the Trustee will pay each of your unsecured creditors a percentage of that monthly payment. Whatever portion of your debt that is left unpaid at the three (3) or five (5) year mark is then discharged.
The downside of a Chapter #13 is obviously the time it may take to get through the plan and the fact that you do have to pay some of your debt. A possible benefit of a Chapter #13 filing is that you actually can discharge some of your debt despite your relative high income. There is another benefit of a Chapter #13 filing for those of you who own your home and have not only a first mortgage but multiple mortgages, liens, or have borrowed against the equity in your home, a HELOC. If you desire to keep your home and if your home is valued less than what you owe on your first mortgage, then in your Chapter #13 filing you can also file a ‘lien strip’ motion. This means that you will ask the Bankruptcy Court to ‘strip away’ the junior liens and that debt will no longer be secured by your home. Then, as you complete your Chapter #13 repayment plan, you end up with your home and only the first mortgage. Also, if you have gotten behind in your mortgage payments, you can ‘reorganize’ those back payments in your plan and get those payments current without the fear of losing your home to foreclosure in the meantime.
