For Americans who deal with overwhelming debt, bankruptcy provides a financial reset. However, understanding the bankruptcy process is not a trivial matter, nor is knowing which type of bankruptcy is suitable for you. These are complex questions that should be worked through with an experienced bankruptcy attorney.
Two types of bankruptcy are available to individuals in the United States: Chapter 7 bankruptcy and Chapter 13 bankruptcy. Read on to find out how these work and the pros and cons of filing each type of bankruptcy.
What is Chapter 7 bankruptcy?
Chapter 7 bankruptcy, also known as “liquidation bankruptcy” or “straight bankruptcy,” is a legal process that allows qualifying debtors to get most of their debts discharged (wiped out). If you qualify for Chapter 7, you can get your unsecured debts wiped out, usually within 6 months of filing. (Some types of debts are usually excluded, such as most student loans.
By the letter of the law, Chapter 7 can also cause you to lose some assets, depending on how much equity you have and the applicable state laws regarding exemptions. That said, the idea that Chapter 7 will result in your assets being sold is mostly a myth. The vast majority of debtors who file Chapter 7 either have their assets protected by exemptions or simply have nothing of value to take; very few Chapter 7 cases actually result in the sale of assets. If you have assets that could be at risk, a bankruptcy lawyer may advise you to file Chapter 13 instead.
What is Chapter 13 bankruptcy?
Chapter 13 bankruptcy, also known as reorganization bankruptcy, rolls your debts into a repayment plan, usually for 3 to 5 years. When the repayment plan is complete, any remaining debt is generally discharged. Chapter 13 helps debtors get caught up on their secured debt, such as auto loans or mortgages, and it makes it easier to retain your assets if they aren’t protected by an exemption. However, it’s also a much longer process than Chapter 7.
What both forms of bankruptcy have in common
While there are important differences between Chapter 7 and Chapter 13, it’s important to remember that they both provide immediate relief from collection action. When you file for bankruptcy, the court issues an “automatic stay” that blocks your creditors from trying to collect your debts, including repossession, foreclosure, wage garnishment, collection calls, and so on. Either type of bankruptcy also halts any lawsuits and other legal action from your creditors.
Pros and cons of each type of bankruptcy
Again, ultimately, only an attorney can tell you whether it’s in your interest to file Chapter 7 or Chapter 13. However, some of the advantages of Chapter 7 include the following:
- It’s typically a faster and less arduous process, with debts discharged within 6 months.
- It allows you to wipe out your eligible unsecured debts (such as credit cards and medical debt).
- There is no repayment plan; you’re immediately free to direct your income toward paying for necessities and rebuilding your finances.
- The attorney’s fee for Chapter 7 is typically lower than for Chapter 13.
Some of the advantages of Chapter 13 include the following:
- It allows you to stop foreclosure and repossession and keep your assets.
- It has a less negative impact on your credit score; although both forms of bankruptcy are quite bad for your credit, Chapter 13 only stays on your credit report for 7 years compared to 10 years with Chapter 7.
- You may be able to file for Chapter 13 even if you can’t pass the means test for Chapter 7.
- You can roll your attorney’s fee for Chapter 13 into the repayment plan, whereas for Chapter 7, you generally have to pay upfront.
Overall, Chapter 7 is the more common form of bankruptcy nationally because it is faster, cheaper, and wipes out more debt. However, this varies by jurisdiction: for instance, in the Western District of Tennessee, which includes Memphis, Chapter 13 is significantly more common than Chapter 7.
Which court has jurisdiction over bankruptcies?
In the United States, bankruptcy is a matter of federal law, so both Chapter 7 and Chapter 13 bankruptcy cases are heard in federal court. In addition, each federal district court has an associated bankruptcy court that handles bankruptcy cases in its jurisdiction. For instance, Tennessee has three bankruptcy courts: the Western District of Tennessee, the Middle District of Tennessee, and the Eastern District of Tennessee.
As a federal law, the bankruptcy code is the same no matter where you are in the country. However, state law does affect some aspects of the process, including the amount of assets you are allowed to exempt from bankruptcy. Each bankruptcy court also has its own procedures and tests to evaluate evidence. As such, it’s important to hire a bankruptcy lawyer with experience in your jurisdiction.
What happens when you file for bankruptcy?
Regardless of the type of bankruptcy you choose, there are a few steps that happen immediately when you file:
- Before filing, you must attend a court-approved credit counseling course.
- When you file, the bankruptcy court issues an “automatic stay,” which immediately stops all collection actions while your case is pending. If you file Chapter 13, there is also a “codebtor stay” that protects your codebtors (e.g., co-signers or joint account holders) from collections.
- You must attend a “meeting of creditors,” also called a 341 meeting, to answer questions from the bankruptcy trustee. (Note that your creditors don’t actually have to attend this meeting and often do not.) This is usually 4-6 weeks after the filing.
- After the 341 meeting, you must also attend a pre-discharge debtor education course.
- In Chapter 7, your debts will most likely be discharged within 6 months.
- In Chapter 13, a repayment plan is usually confirmed within 30 days of the 341 meeting. You then need to keep up with the repayment plan for 3-5 years.
Of course, this is assuming the entire process goes on schedule. Several types of objections and controversies can derail the progress of your bankruptcy. That’s why it’s in your interest to work with an experienced bankruptcy lawyer to guide your case forward.
How can a bankruptcy attorney help me?
There are several reasons it’s in your interest to hire a bankruptcy lawyer to handle your case. First, a lawyer can analyze your situation, explain whether Chapter 7 or Chapter 13 bankruptcy is in your interest, and help you find a path forward. Your attorney can file all the necessary forms with the court and represent you in the 341 meeting and any other legal proceedings. Finally, if there are disputes regarding your bankruptcy – for example, whether a particular debt is dischargeable or whether you can keep a particular asset – your lawyer can represent your interests and fight for the best possible outcome.
Remember, while the bankruptcy code is the same everywhere, each bankruptcy court is different. That’s why it’s in your interest to hire an attorney who has experience handling bankruptcy cases in your jurisdiction and knows the judges and legal procedures. If you’re facing overwhelming debt and are considering a financial reset, contact a bankruptcy lawyer in your area today.
