Consumer bankruptcy cases are filed by individuals and married couples seeking the protection of the bankruptcy code. Bankruptcy debtors receive protection from debt collection efforts.
This article explains how chapters 7 and 13 bankruptcy work. If you have questions about the bankruptcy system or which consumer bankruptcy chapter is best for you, talking with a bankruptcy attorney is the best option. The Law Offices of B. David Sisson provides free consultations.
Chapter 7 Consumer Bankruptcy Cases
Chapter 7 consumer bankruptcy cases are usually filed by bankruptcy debtors who do not have assets or the ability to repay any of their debts. To qualify to file for chapter 7 under the bankruptcy code, you must:
Not have filed a previous Chapter 7 bankruptcy case petition within the last eight years.
Fall within the guidelines of the Means Test.
Complete the required credit counseling within 180 days of filing for bankruptcy.
Pay the filing fee or prepare and file the waiver for the filing fee with the bankruptcy court. If the bankruptcy court does not approve the waiver, you must pay the filing fee; sometimes it’s possible to pay it in installments.
Once the chapter 7 petition is filed, debt collection efforts must stop. As a bankruptcy debtor, you will be allowed to keep certain items that you own because they are exempt under either federal or state bankruptcy code. In Oklahoma, the state bankruptcy exemptions are followed. For your home, the fair market value is used. For personal property, the liquidation value is used. The liquidation value can be explained as the garage sale value. While it may seem unfair to think of your belongings in this manner, it may help you keep more of them.
Any belongings you own that exceed the exemptions can be liquidated by the trustee. The proceeds from the liquidation are used to repay creditors at least some of what they are owed.
The debts are organized in a certain manner:
Mortgage debt is a secured debt because if it does not get paid, the home is foreclosed upon and the bank takes the home.
Credit card debt is generally unsecured debt (although there are some secured credit cards).
Most consumer bankruptcy cases that are chapter 7 are considered "no asset" cases. This means that the bankruptcy debtor doesn't own anything that the trustee can liquidate. At the end of the bankruptcy case, the discharge is issued.
The bankruptcy code generally does not allow for the discharge of student loans in chapter 7 bankruptcy cases.
Chapter 13 Consumer Bankruptcy Cases
Chapter 13 consumer bankruptcy cases are reorganization bankruptcy cases. The question you must ask yourself is: Do I have the income to repay creditors over a period of time?
That's what chapter 13 bankruptcy allows you to do. You still receive the protection of the bankruptcy court to stop debt collection. It can even be used to reorganize mortgage debt and get caught up on past-due house payments.
There are some key differences between chapters 7 and 13. With chapter 13 bankruptcy:
Chapter 13 does not require you to give up any of your belongings to pay off debt.
As a bankruptcy debtor, you will be required to create a budget that includes a repayment play for your debts. The bankruptcy court must approve your budget and your repayment plan.
All of your disposable income must be used to repay creditors over the next three of five years.
You must make plan payments directly to the trustee. The trustee will pay the creditors after the repayment plan is approved by the bankruptcy court.
Just like chapter 7 consumer bankruptcy, the discharge is received at the end of the bankruptcy case. However, the dischargeability of student loan debt generally does not occur.
Debt Categories in Consumer Bankruptcy
In both chapters 7 and 13, debts are categorized to determine how they will be paid.
Priority debts are paid in full for chapter 13 repayment plans. Priority debts can also exist in chapter 7 bankruptcy cases even if they are no-asset cases. Those debts are not dischargeable. Examples of priority debts include back child support or alimony, as well as federal and state taxes.
Secured debts are debts that are secured by property of some kind. The two most common in consumer bankruptcy cases are the family home and a car. Depending on your circumstances, you may be able to reaffirm these debts with the lenders.
Unsecured debts are debts that you owe that do not have a security. The most common examples include credit cards and medical bills.
In chapter 7 no-asset cases, priority debts aren't discharged and none of the creditors receive any type of payment. If it is an asset case, the amount of money the creditors receive depends on the amount of money available. However, payments generally start with priority debts.
In chapter 13 bankruptcy cases, priority debts must be included in the repayment plan. Secured debts and unsecured debts must also be included, although unsecured debts may not be paid off in full.
Free Consultation: Consumer Bankruptcy
The bankruptcy code can be complicated on its own. An experienced bankruptcy lawyer can help you better understand what happens in consumer bankruptcy cases. To learn more about chapters 7 and 13 and which is the right option for you, the Law Offices of B. David Sisson offers free consultations.