Bankruptcy Basics
There are several different types of bankruptcy available to you depending on your situation. The following types are the most common.
Chapter 7 - A Fresh Start
Chapter 7 is designed for individuals (debtors) who do not have sufficient income or property to pay their debts along with ordinary household or business expenses. Individuals living in Texas may choose Texas or Federal exemptions. The exemption laws exist so insolvency doesn’t mean an individual loses his or her home, car or truck, house furnishings, clothing, retirement and other listed personal belongings. You are required to pay for exempt property, and in most cases, you keep what you pay for. There are exceptions to every rule that we can discuss in person. A typical Chapter 7 Fresh Start Bankruptcy is a “no asset case.” This means the individual or joint, if husband and wife, do not hold or possess any non-exempt property that the Chapter 7 Trustee will sell to pay the individual or joint debtors’ debts.
A Fresh Start Bankruptcy Discharge takes 3-4 months after the individual or joint debtors’ case is filed. A Discharge of the debtor’s debt means the legal obligation of the debtor is wiped out or eliminated. A creditor or entity who the debtor owes cannot legally require a debtor to satisfy a debt that has been discharged in a Chapter 7 Bankruptcy. Types of debts that are discharged can include
- Credit cards
- Medical bills
- Unsecured loans
- payday loans
- Collection agency
- Overdrafts
- Deficiency claims after repossession
- Sale of an individual or joint debtors’ car, truck or home.
Debts that will not be discharged can include debts secured by property that an individual or husband and wife want(s) to keep. In most cases, individuals or husbands and wives want to keep their home, car, furniture, and continue paying for these debts. Other kinds of debts that are not discharged in most cases is child support and student loans. Although, student loans can be discharged if an undue hardship exist on the debtor(s) or the debtor(s)’ dependent(s). Taxes, property settlement obligations, fines, penalties, and criminal restitution debts are not dischargeable. The most important thing to remember is to list all debts in a Chapter 7. Debts not listed are not dischargeable. In some cases an special proceeding may be filed in a Chapter 7 bankruptcy to have the Court or Judge determine as a matter of law if a specific debt is dischargeable or discharged. This special proceeding is called an adversary proceeding. Finally, debts for death or personal injury caused by operating a motor vehicle, vessel, or aircraft while intoxicated from alcohol or drugs are not discharged.
Chapter 13 - Reorganization Chapter 13
Bankruptcy works like bill consolidation, but better! In your Chapter 13 Plan
- Credit cards
- Medical bills
- Signature loans
- Finance company loans
- Collection agencies
- Bank overdrafts
- Deficiencies owed after repossession
- Foreclosure
The amount you pay these creditors is based on your disposable income and after paying secured creditors in your Chapter 13 Plan. Secured creditors are paid after the balance of my attorney’s fee is paid in most cases. Also, general unsecured debts are paid after you Chapter 13 Plan pays back child support, IRS taxes and property taxes. Like Fresh Start Bankruptcy under Chapter 7, general unsecured debts are discharged, after completing plan payments. Practically, credit cards, medical bills, signature loans, finance company loans, collection agencies, bank overdrafts and deficiencies are paid less than 1% of the amount they claim to be owed. In other words, if you owe $100,000 for example only, you pay $100 total and discharge or wipe out $99,900!
The debtor, the individual or husband and wife filing the bankruptcy, maintain(s) possession of their exempt and non-exempt and pay(s) to the Chapter 13 trustee their disposable income for a period of at least 36 months and up to 60 months. In most cases, disposable income is the difference between monthly gross income and monthly household expenses. A debtor or debtors who are self-employed or own and operate a business also deduct their monthly business expenses from gross receipts and income.
A Chapter 13 Plan can pay back taxes owed to the IRS, past due mortgage payments on homes and businesses and property taxes, for example. In Chapter 13, the trustee does not sell the debtor’s non-exempt property. Instead, an individual or husband and wife keeps their non-exempt property and pays the value of their non-exempt property as part of their Chapter 13 Plan payment, to the Chapter 13 Trustee who disburses a pro rata payment to the individual or husband and wife’s unsecured creditors.
In a Chapter 13, you may be able to “cram-down” certain secured debts. A “cram-down” means you can pay the lesser of the value of your property that is collateral for the secured debt. Examples include cars and trucks that were financed over two and half years ago, your Chapter 13 Plan only pays the cram-down value of the car or truck and balance is classified like a credit card, called unsecured debt. Also, interest rates can be cram-down nearly to current prime rate, 3.25%. The result is a much lower car or truck payment, being paid in the Chapter 13 Plan. And, your car or truck is protected from repossession while you keep current on your Chapter 13 Plan payments and maintain adequate insurance coverage against damage to your car or truck.
Other secured debts such furniture and appliances can be cram-downed to value and near current prime rate at the time of filing a Chapter 13 case.
- If you have filed a Chapter 7 bankruptcy for which you received a Chapter 7 discharge in the last 8 years, you will not be eligible to file another Chapter 7
- Like Chapter 7, certain debts are non-dischargeable (Child support, property settlement obligations, student loans.)
- Chapter 13 is often used to stop foreclosure on homes and business property