A Quick Guide To Bankruptcy Procedures
There are two different bankruptcy procedures for individuals. These proceedings are known as Chapter 7 and Chapter 13. While you may be familiar with the term Chapter 11 from the news, that chapter applies to business owners only.
In October 2005 Congress changed the bankruptcy laws making it much more difficult to simply walk away from personal debt. The new law essentially says pay back the debt through a court approved payment plan and you can keep your house and some other property (Chapter 13); or sell everything you own, including your property, to pay what you can to discharge your debts (Chapter 7).
If a person opts for Chapter 7 they are essentially agreeing to liquidate all of their belongings and property, with the exception of work related tools and some basic household goods, to pay back the debtors. This is called a straight bankruptcy. To insure that the debtor does not profit from this discharge of debt, the law puts a restriction on how much the debtor can earn while the bankruptcy proceeds.
Once you have filed for Chapter 7, you will not be able to file again for eight years. Chapter 13 on the other hand, has a waiting period of only two years between filings.
Both Chapter 7 and Chapter 13 can eliminate unsecured debt, stop foreclosure proceedings, and halt collection processes. The differences lies in the way that those debts are discharged. Some debts such as alimony, child support, student loans and some taxes are exempt from the bankruptcy proceedings and cannot be eliminated.
Chapter 7 is a straight liquidation. Chapter 13 is a pay back plan. However, unless your plan satisfies all of your debt over the term of the bankruptcy, the Court usually will not allow the debtor to keep property like a boat, time share, recreational vehicles and the like. These items must be sold to meet the requirement to pay all the debt within the scheduled time.
Bankruptcy is no longer the slam dunk procedure that it was. The new law now requires that persons wanting to file either Chapter 7 or 13 attend an approved credit counseling course sometime within the six months before filing. This is another effort to solve the credit crisis without further clogging up the courts with another bankruptcy. In addition, there is now a “means test” for persons wanting to go the liquidation route. If the court believes that you make too much income to just walk away from the debt via liquidation, they will only allow you to file Chapter 13 which is the pay back plan.
Bankruptcy is an emotional time but a necessary step for those who absolutely need the relief.