An individual who is badly in debt can file for bankruptcy either under Chapter 7 (liquidation, or straight bankruptcy) or under Chapter 13 (reorganization). The choice is not a coin flip. The appropriate chapter depends on the situation. The debtor’s disposable income and the type of relief sought plays a tremendous role in the choice of chapters. In some cases the debtor simply cannot file under Chapter 13, as he or she cannot, if he or she simply lacks the disposable income necessary to fund a viable Chapter 13 plan (see below).
Under Chapter 13, the debtor proposes a plan to pay his creditors over a 3 to 5 year period. During this period, his creditors cannot attempt to collect on the individual’s previously incurred debt except through the bankruptcy court. In general, the individual gets to keep his property, and his creditors end up with less money than they are owed.
The disadvantage of filing for Personal Bankruptcy is that a record of this stays on the individual’s credit report for 10 years. During the pendancy of a Chapter 13 case the debtor is not permitted to obtain additional credit without the Chapter 13 Trustee’s permission. Moreover, creditors may not be willing to risk lending money to such an individual. However, this disadvantage is not unique to Chapter 13; it may also apply to individuals currently in a Chapter 11 case or those who are in or have recently been in a Chapter 7 case.
The advantages of Chapter 13 over Chapter 7 include the ability to stop foreclosure, to achieve a super discharge of debts of kinds not dischargeable under Chapter 7, to value collateral, to bifurcate the security interest of creditors in certain property that creditors are either charging too much interest for, or are over-secured, or both, and in some cases, to prevent collection activities against non-filing co-signers (co-debtors) during the life of the case.
A Chapter 13 Plan is a document filed with or shortly after a debtor’s Chapter 13 bankruptcy petition. The plan details the treatment of debts, liens, and the secured status of assets and liabilities owned or owed by the debtor in regard to his bankruptcy petition filed in United States Bankruptcy Court. For the plan to be confirmable, it must, at a minimum (actually there are more requirements and these vary from state to state), meet all of the following tests:
- Commit every penny of the debtor’s household’s disposable income to the Chapter 13 Plan for at least three years (unless a 100% repayment of all unsecured debt will occur in less than three years), or up to five years, but longer than three years only if the debtor elects it.
- Provide that unsecured creditors will receive at least as much through the Chapter 13 Plan as they would in a Chapter 7 liquidation.
- Provide a meaningful payback to the unsecured creditors. In some districts and divisions this means as little as a one cent on the dollar payback. In others it may be as much as twenty cents on the dollar.
Bankruptcy | Proceedings | Chapter 7 | Chapter 11 | Chapter 12 | Chapter 13 | Abuse and Fraud