Bankruptcy Questions: Chapter 7 And Chapter 13

Answers to many commonly asked bankruptcy questions are explained in detail here....

Deciding to file bankruptcy can be a difficult decision. Once this decision is made it may be more difficult to choose which chapter is for you. Though the majority of cases filed are Chapter 7 bankruptcies, you may feel that chapter 13 is the better choice for you. Some however will not have the option of making a choice due to qualifications or other circumstances.

A Chapter 7 bankruptcy case can be voluntary or involuntary. Contrary to the knowledge of many debtors, their creditors may force them into bankruptcy.

If a debtor owes more than 12 creditors, a bankruptcy case may be files when three creditors whose unsecured claims equal $10,000 or more, signing a petition. In the event that there are less than 12 creditors, only one need sign the petition. The creditors' claims must not be subject to bonafide dispute. The creditors have the burden of proving that the debtor generally does not pay bills as they become due or that a custodian has been appointed in the debtor's interest in the last 120 days.

Once the involuntary petition and the summons are served on the debtor, he has 20 days to respond. The debtor may consent to the case. He then has the option to convert to another chapter of bankruptcy. Or the debtor can contest the matter. If the matter is disputed, an adversary proceeding will be held. However, if the debtor does not respond the case will go into effect by default.

Once the chapter 7 case is in effect, whether by voluntary or involuntary efforts, the appointed trustee will call all of the debtor's non-exempt assets. The property will then be sold as the trustee deems fit and the proceeds will be distributed among the creditors.

Some creditors will receive a small portion of the of the amount owed to them while many others will receive nothing. Creditor may not seek payment for any balance of unpaid debt from the debtor. Creditors are free to seek relief however from co-debtors.

A large number of these cases are no-assets cases. In such, all of the debtors assets are non-exempt or have liens that leave them without equity. There are therefore no assets available for the trustee to sell and all creditors will lack relief from the debtor. Once again these creditors are free to see the unpaid debts from co-debtors.

Certain debts will not be eligible for discharge and will remain the debtor's responsibility. Examples of such debts that most debtors have are taxes, debt not discharged in a previous case, child support and alimony, and fines and restitution. Other non-dischargeable debts that are less common are post-petition condominium fees and assessments, damages that result from drunk driving, and fraud or defalcation to a financial institution.

Once qualified debts are discharged the debtor will be left with sufficient assets for a fresh start. Though a fresh start may be available to the debtor in only a few months, the debtor must keep in mind that the trustee may object to the discharge. A discharge may only be granted once per six years.

Other individuals consider a Chapter 13 bankruptcy. Individuals who have massive debt need not contemplate this as an option. In order to qualify, an individual may not have more than $250,000 in unsecured debt or $750,000 in secured debts.

Even if a debtor is eligible within the debt limits, there must be a regular source of income. This source does not have to be wages. Public assistance, pension benefits, and dividends are examples of acceptable sources. Lump sum gifts or settlements are not acceptable. The key is the regularity of the funds.

If the debtor qualifies to file a Chapter 13, he will have 15 days after filing the petition to propose a plan to satisfy debts. The plan must cover a period of at least three years but may not exceed five years. It also must propose to pay all priority claims in full while treating all other claims in similar classes with equal consideration.

The debtor may choose how secured debts are to be settles. The first option available is surrendering the collateral. The collateral may be returned to the creditor for any reason. This includes the lack of desire to continue paying for it.

The second option available to the debtor is paying the creditor either the balance remaining or the current fair market value depending upon which is less. Unlike the Chapter 7 debtor, who would have to pay a lump sum, in a Chapter 13 case the debtor may retain possession while making payments over an extended period of time.

This chapter also provides some protection for co-debtors. Creditors can only seek relief of any balances that the plan does not propose to pay. If the plan proposes to pay creditors in full, they may not attempt to expedite relief by seeking payment from the co-debtor.

The plan must meet the Chapter 7 liquidation test in order to be deemed valid. Unsecured creditors must receive at least as much as they would in a that a Chapter 7 case had been filed and creditors had received monies from the sale of assets.

If the test is met, the debtor may keep his non-exempt assets. If the plan does not meet the liquidation test, the debtor will be forced to submit all of his disposable income.

If the plan is undisputed and approved, there still will not be an immediate discharge. Discharge of all debts not paid is granted upon completion of the plan which takes several years. Though discharge cannot be denied , the case may be dismissed.

There may be situations in which the debtor is unable to fully pay all debts as proposed in the plan. This will not automatically result in dismissal. If the court finds that payment failure was due to uncontrollable circumstance versus negligence and that total payments to unsecured creditors meet the liquidation test, the court may grant a discharge.

More debt will be eligible for discharge than in a Chapter 7 case. The only debts that will not be discharges are alimony and child support, criminal restitution, student loans, and damages incurred as a result of drunk driving.

One of the most notable benefits of the Chapter 13 bankruptcy is that there is no time limit restraining the debtor from filing another anther Chapter 13 case. Also, even though Chapter 7 filers must wait 6 years to file another Chapter 7 there is no time restraint if they wish to file a Chapter 13.

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