Cheryl L. Stengel

Bankruptcy Options

Chapter 7: Liquidation

This is the most common type of bankruptcy.

Purpose: The goal is to stop collection pressure and give individuals a “fresh start” by discharging all dischargeable debt.

Eligibility: The means test is applicable if a debtor’s household income is above the state median. While it is more difficult for a high income debtor to qualify for Chapter 7 relief, it is often possible.

Most individuals do not lose assets: The law allows an individual debtor to retain certain assets. The majority of individuals do not lose any assets in Chapter 7 bankruptcy; however, that depends on asset equity and other factors.

After case filing: A bankruptcy trustee is a neutral fiduciary appointed to analyze assets and collect any nonexempt, valuable property from the debtor for liquidation. The trustee will distribute any liquidation proceeds to creditors. Over 90% of individual cases are no asset. There will be one meeting with the trustee, and possibly a follow up meeting.

“Discharge of debt”: Occurs by court order approximately three months after case filing. Discharge creates a permanent bar on collection of the pre-bankruptcy debt.

Effect of discharge: The discharge is broad and will generally include all debts owing based on credit card debt, medical debt, unsecured loans, car loan deficiency, home loan deficiency, etc. There are certain automatic exceptions to discharge including recent taxes, child and spousal support, divorce-related debts, and student loans. Debts based on fraud or other “bad conduct” may also survive a bankruptcy if the creditor timely objects and prevails.

Secured debt: Voluntary liens, such as home mortgages and car loans, are unaffected by the Chapter 7 bankruptcy. While the debtor’s personal liability may be discharged, if the debtor wishes to retain the secured asset, regular payments to the creditor will need to continue. Chapter 7 offers only temporary relief from a pending foreclosure-–the lender may resume foreclosure after the bankruptcy or during the bankruptcy upon court approval, unless the default is cured.

Life Post-Bankruptcy: A bankruptcy filing will be reported by most credit bureaus for 7-10 years. Although, the negative effect of the bankruptcy will improve over time. Generally, a person’s credit score is substantially rehabilitated 2 years after the case filing. Many banks and car lenders view a person with a bankruptcy as a good credit risk due to inability to file another bankruptcy soon and increase in disposable income due to discharge of debts. Many lenders will extend credit shortly after discharge; however, the terms will be less than ideal.

Chapter 13: Personal Reorganization

Eligibility: For individuals with regular income from any source in excess of monthly living expenses. The debtor must have some monthly disposable income to qualify for Chapter 13. Eligibility is subject to debt limits, currently approximately $420,000 in unsecured and $1,258,000 in secured debt. These dollar amounts adjust every three years.

Purpose: Excellent option for stopping collection pressure and addressing debt under a repayment plan. Chapter 13 allows curing of a home loan or car loan default, structured repayment of nondischargeable debts, i.e., taxes, spousal or child support, and partial or no payment to general unsecured creditors. Chapter 13 is also a good option for an individual(s) with valuable assets, which may otherwise be liquidated in a Chapter 7 case. Also intended for high earning debtors who do not qualify for Chapter 7 based on the means test.

Operation: Repayment of creditors over 36-60 months per a court-approved plan. Unsecured creditors may be paid 0%-100%, depending on debtor’s income and asset equity. The debtor retains all assets. Monthly payments are made to a trustee who distributes funds to creditors in monthly installments.

Real estate mortgages: It is possible to void junior liens on real property if the home value is less than the balance owing on the 1st mortgage. The terms of the 1st mortgage loan on residential property cannot be modified. Nonresidential mortgage debt may be modified, depending on the real estate value.

“Discharge”: Discharge of debts is entered upon completion of plan, generally 36-60 months after case filing.

Chapter 11: Reorganization

Primarily used by business entities, but also available to individuals with debt in excess of the Chapter 13 limits.