Bankruptcy Summary

Chapter 7 vs. Chapter 13

The two main types of bankruptcies available to individuals deal with different debt situations in different ways. The typical Chapter 7 debtor has few assets and considerable debt primarily associated with credit cards, store purchases, hospital bills and other dischargeable debts. Creditors are paid, if at all, from anything that the debtor currently owns that cannot be claimed as exempt. Certain debts are not "dischargeable" in a Chapter 7 proceeding, but are dischargeable in a Chapter 13. "Dischargeable" means that by filing for bankruptcy, you will not have to pay the debt if the court grants the discharge. The typical Chapter 13 debtor files because the debtor is in arrears with rent, mortgage payments, car loan or other secured debt; because the debtor has substantial debts which cannot be discharged in a Chapter 7 bankruptcy; or because the debtor has some assets which cannot be claimed as exempt. Another reason to file a Chapter 13 is to protect someone else who may be liable for your debts, such as a co-signer or spouse. In Chapter 13, creditors are paid out of the debtor's future earnings and a "plan" must be proposed to pay these creditors. In order to quality for a Chapter 13 bankruptcy the debtor must be an individual with regular income. This regular income may consist of wages, commissions, rents, public benefits, social security, unemployment compensation, alimony, child support, pensions or other types of income which can be estimated. In a Chapter 13 bankruptcy, taxes are paid first. Next, landlords, mortgage holders and other secured creditors must be paid in full (100%) over the 36-60 month period of the Chapter 13 plan if the debtor wants to keep the apartment, house or other asset which secures the debt. Finally, other unsecured creditors will receive whatever remains after "100%" creditors are paid. Unsecured creditors do not necessarily have to be paid in full. !f the unsecured debts are greater than $250,000 or the secured debts are greater than $750,000, the debtor is not eligible to file a Chapter 13 proceeding. Generally, if all of your debts are dischargeable, a Chapter 7 would be advisable. However, if your financial situation is clouded by rent or mortgage arrears, tax debts, student loans or substantial assets, a Chapter 13 might be advisable.