Chapter 7 and Chapter 13 Bankruptcy Basics
Residents of Florida fall behind on their debts for all types of reasons. Some people lose their jobs. Many debtors have large medical bills and credit card debts. Some debtors spend more than they can afford. Divorce can make it difficult to meet expenses. Chapter 7 and Chapter 13 are two types of bankruptcies that help debtors obtain a fresh start. Chapter 7 is generally used for debtors who have unsecured debts. Chapter 13 is generally used for debtors who have secured debts such as a home mortgage.
The automatic stay
The filing of a Chapter 7 or a Chapter 13 bankruptcy petition helps gives debtors room to breathe. As soon as a petition is filed, all credit actions must cease immediately including foreclosure actions and actions to collect on a judgment. The stay continues until a creditor (who has proper grounds) seeks relief from the automatic stay. Generally, only secured and priority creditors have grounds and even for these creditors there are limitations if the debtor complies with the basic bankruptcy requirements.
Chapter 7 bankruptcy basics
In a Chapter 7, the debtor files a petition that lists all his/her assets and debts. Debts are generally categorized as:
- Secured debts. The debtor agreed that if he/she did not pay the debt, then a specific asset such as a home or car could be sold to pay the debt.
- Unsecured debts. These are debts that are not secured. For example, most credit card debt is unsecured.
- Priority debts. These are debts that cannot be discharged in bankruptcy. Common examples include federal income taxes and child support.
Once the Chapter 7 petition is filed, a bankruptcy trustee is appointed to oversee the bankruptcy process. The trustee will set up a meeting where the trustee and creditors can question the debtor about their financial situation. In most Chapter 7 cases, only the trustee, the debtor, and the debtor’s lawyer appear at the trustee’s meeting.
How does means testing work?
Ever since the 2005 bankruptcy law was enacted, debtors must meet the Chapter 7 means test in order to qualify for a Chapter 7 bankruptcy. The law was enacted to ensure that debtors who are in a position to pay their debts pay their obligations through a Chapter 13 repayment plan instead of having the debts discharged through a Chapter 7 bankruptcy.
The means test examines the income for the debtor, the size of the debtor’s family, and the location where the debtor lives. The income is then compared to a baseline (a median debt) for debtors with similar-sized families in the same location. If the debtor’s income falls below the means test limit, the debtor can file for a Chapter 7 bankruptcy. Otherwise, the debtor must file a Chapter 13. Most Chapter 7 filers, but not all, do fall below the means test limit – mainly because most Chapter 7 filers have a limited income. There are some additional means test requirements that an experienced Indian River bankruptcy lawyer can explain.
Debtors who file a Chapter 7 are also required to show that they took an approved debt counseling course before they filed for bankruptcy. Many courses are offered online. A skilled bankruptcy lawyer can recommend a convenient course.
Can debtors protect any of their assets?
Yes. The Bankruptcy Code permits debtors the right to “exempt” some of their assets from seizure by the trustee. These assets include some equity in a debtor’s home, cars, tools, jewelry, personal possessions, some cash and accounts, and some other assets. There are financial limits on the amount of assets that can be protected. Many debtors are able to save many of their assets from the reach of the trustee - provided the assets are not subject to a security interest by a creditor.
Some assets are fully protected from seizure by the trustee or creditors. For example, Social Security retirement benefits generally cannot be seized by the trustee or creditors.
The trustee has the right to seize any unprotected assets and sell those assets to pay off the creditors.
How does a discharge work?
Once the trustee holds a creditor’s meeting and proceeds with the seizure and sale of any non-exempt or non-protected assets, the trustee will recommend that the debtor be discharged from his/her duty to pay any unsecured debts. In many Chapter 7 bankruptcy cases, the trustee does not seize any assets. The time from the filing of the bankruptcy petition until the trustee’s recommendation for discharge is normally about four to six months.
The bankruptcy judge reviews the trustee’s recommendations. If everything is in order, the judge will approve the discharge.
Generally, creditors cannot proceed to try to collect on any discharged debts. In some cases, a debtor may reaffirm a debt. For example, a debtor who wants to keep a car may agree that he/she will continue the car payments in order to keep the car.
Debtors normally cannot file for another bankruptcy within 10 years of the date of the bankruptcy charge.
How does a Chapter 13 bankruptcy work?
Debtors who have secured assets or cannot meet the means test are required to file a Chapter 13 bankruptcy. In a Chapter 13, the debtor prepares a repayment plan to be paid within 3 to 5 years. The plan generally requires that the debtor:
- Pay the arrears on the secured debts over the 3 to 5 year period. For example, if a debtor is $30,000 in arrears, the debtor can pay $500 a month towards the arrears for 60 months/5 years.
- Continue to pay the monthly payments that are due. The most common example is the debtor pays the monthly mortgage payment.
- Pay a percentage of the unsecured debts during the length of the repayment period. A skilled debtor’s lawyer helps debtors understand what percentage is required.
Debtors who file a Chapter 13 are entitled to an automatic stay. Chapter 13 debtors also attend a creditor’s meeting. At the end of the 3 to 5 year repayment period, any unsecured debts remaining are discharged.
Schedule an appointment with an Indian River County bankruptcy lawyer today!
At Lulich & Attorneys, our Vero Beach and Sebastian lawyers represent both debtors and creditors. We understand the alternatives to bankruptcies and when bankruptcy is a debtor’s only option. To discuss your debt or creditor situation with an experienced Indian River County financial lawyer, call us at 772-589-5500 or fill out our contact form.