Chapter 7:
- The goal in chapter 7 is to wipe off the debts and never pay them back again. In order to qualify for a chapter 7, you need to pass the government's means test.
- In a chapter 7, you file 45 to 60 pages or so of paperwork, you go to a trustee hearing, the trustee examines your paperwork and recommends to the court to grant you a discharge, the court grants you the discharge and you are done.
- There are two main events in a chapter 7 and they are, (a) the filing of the bankruptcy documents and (b) the trustee meeting that is held about 4 weeks later.
- For most debtors, that is pretty much all you have to do. You get a notice in the mail about 4 months later saying that the debts are discharged, never again to be owed.
CHAPTER 7
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CHAPTER 13
Deliver Us From Debt Services:
Chapter 13:
- The goal in a chapter 13 is to pay back some or most of the creditors, over a 3 to 5 year period. The obvious question that comes up is, why would anyone want to pay back their debts if they can get them discharged in a chapter 13? There are many reasons why a person may want to file a chapter 13 instead of a chapter 7 and here they are.
You may want a chapter 13 if...
- You are behind on some of your secured debts and you need time to get caught up. For example, let us say that you are several months behind on your mortgage and you are afraid that they will foreclose on the property, but you do not have the money to get caught up on the arrearage. If you can handle your regular monthly payment of say, $2,000 and you have $8,000 in back payments, it would make sense if you can be given say, 36 months to pay off the $8,000 while you keep up with the regular payments. Chapter 13 gives you the time you need to pay off the back payments and avoid foreclosure by setting up a repayment plan. In this example, you might set up a plan where you pay off the $8,000 with monthly payments of $220. That is a lot better than loosing your house in foreclosure.
- In this situation, what would happen if you filed a chapter 7? It would depend on the rest of your debt picture. Under a chapter 7, you will not be given time to pay off the $8,000 in back payments and the lender could still proceed with a foreclosure after a brief delay caused by the filing of bankruptcy. Now, if you have the means of pay off the $8,000 but your problem is that the credit card payments are draining you, filing a chapter 7 could make sense because with those debts gone, you can devote all available funds to paying off the $8,000 arrearage. On the other hand, if you still cannot pay off the $8,000 arrearage in a chapter 7, then chapter 13 is your only choice.
This same example applies to other types of secured debts such as auto payments, etcetera.
- If you have taken the chapter 7 means test and do not qualify for a chapter 7 discharge because your income is too high, then chapter 13 is your only choice. You will know this because you have either taken the means test at a site like, www.freemeanstesting.com or you have talked to an attorney and have been told to file a chapter 13.
- There is a waiting period of 6 to 8 years between filing repeated chapter 7s. If you filed chapter 7 some years ago and are not eligible to file again for a few more years, but in the mean time, you desperately need protection from creditors, then a chapter 13 would be the right solution.
- Finally, there are those who refuse to file a chapter 7 because of personal ethics. They feel that paying back their debts is the morally right thing to do and they just need some breathing room to do so. For such people, a chapter 13 bankruptcy is the right solution.
What is involved in filing a chapter 13?
- A chapter 13 bankruptcy uses many of the same forms as chapter 7 as well as one more form known as The Plan. If a chapter 7 document set for a specific person consists of say, 50 pages, the chapter 13 document set will consist of about 51 pages. So, from the stand point of the paperwork, they are similar. But this is where the similarity ends.
- Two fundamental things distinguish a chapter 13 bankruptcy process from a chapter 7 and they are, the enormous attorney fees and the chapter 13 Plan.
- Chapter 13 bankruptcies afford attorneys the opportunity to overcharge their clients. How so, you may ask? The answer is that most chapter 13 attorneys tuck away into the payment Plan, $2,000 to $3,000 in attorney fees, in addition to the initial retainer fee that they ask for upfront. In doing so, they structure the Plan so that they get paid this $2,000 to $3,000 before a single penny goes to the creditors. In the example above, let us say that you are to pay $220 per month to get caught up with the mortgage, you might be stuck paying the attorney $300 to $500 per month in just attorney fees for a whole year, before any of your money goes to paying the mortgage arrearage. In fact, may debtors drop out of chapter 13 in the first year, and the real kicker is that during that time, all they paid was just the attorney fees.
- The second fundamental element in a chapter 13 bankruptcy is The Plan. The Plan is the one or two page document in which you propose to the court how you are going to pay the creditors. Unlike the petition and schedules which are standardized and prescribed by the official federal bankruptcy forms, there is no such a thing as a standard chapter 13 plan for all courts. Each court uses its own plan and the plan used in one district often looks nothing like the plan used in another.
- The Plan is the key difference between a chapter 7 and a chapter 13. The plan maps out what is to happen to your pay check for 3 to 5 years. All of it! While you are in the Plan, your paycheck is not your paycheck but the trustee's. If you get a pay raise while in chapter 13, it is the trustee who decides what happens to it. If you get a tax return, it is the trustee who decides how much of it goes into the Plan.
- While you are in a chapter 13, you have to follow the plan and if you falter, the court could dismiss your bankruptcy and you could end up back where you started, with the only real difference being that the attorney got paid and you got nothing. For some people, it is this constant lack of freedom over their own money that makes them prefer a chapter 7.
Who Can File Chapter 13?
- Any natural person or married couple can file a chapter 13 bankruptcy, provided that they have "regular income." What is regular income? Regular income is any income that you receive that is likely to continue on a periodic basis. This includes employment income, commissions, disability benefits, self-employment income and regular support payments.
- It does not include gifts, gambling winnings, public assistance. If you are unemployed and have no regular income, you do not qualify to file chapter 13. It makes sense since you need dependable income to pay the creditors.
- Corporations and partnerships cannot file chapter 13.
So what are the steps in a chapter 13?
Here are the basic steps...
- You file the chapter 13 bankruptcy documents.
- You file the Plan (if you did not file them with the other documents.)
- You attend the meeting of the creditors or trustee hearing just as in a chapter 7.
- You attend a confirmation hearing in which the judge decides whether or not to approve the Plan that you proposed. (Most courts schedule the trustee hearing and the confirmation hearing for the same time)
- The court approves the Plan or modifies it at the hearing.
- You begin your 3 to 5 year Plan payment period.
- In 3 to 5 years when you have completed the Plan, your bankruptcy ends.
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