Most personal or “consumer debt” bankruptcies are either Chapter 7 or Chapter 13 cases. In rare instances, an individual with considerable unsecured debt will be required to file a Chapter 11 case. Whether a Chapter 7 or Chapter 13 bankruptcy is the right choice for you depends on your income, assets, and types of debt.
Chapter 7 is a liquidation bankruptcy designed to wipe out general unsecured debts such as credit cards and medical bills. A Chapter 7 Trustee is appointed to administer the case. A Chapter 7 Trustee’s job is to collect a debtor’s non-exempt assets for proportional payments to creditors. Some debts, such as child support, maintenance, student loans, and many taxes, are non-dischargeable.
A Chapter 13 case requires a debtor to propose a payment plan lasting three to five years. The amount of the monthly payment is based on a debtor’s disposable income. At the end of the payment plan, any remaining debt owed on unsecured loans is discharged.
As discussed in the “Means Test” section below, debtors whose income exceeds a certain amount must file a Chapter 13 case. Even if a debtor qualifies under the means test to file a Chapter 7 case, there may be other reasons for filing a Chapter 13 case. Chapter 13 cases are commonly filed for debtors who have fallen behind on their mortgage payments but wish to keep their home. Because home loans are secured by the property, they will not simply go away in a Chapter 7 discharge. A Chapter 13 will allow a debtor to keep the home by paying the past due mortgage payments through the plan and continuing to make regular mortgage outside of the plan. A Chapter 13 is also appropriate if the debtor has several non-dischargeable debt as, these debts can be paid through the plan. Additionally, if a debtor has non-exempt assets the debtor wishes to keep, a Chapter 13 plan would allow the debtor to keep these assets by paying into the plan the value of the assets.
A Chapter 13 Trustee administers the plan by collecting the monthly payments and disbursing the funds to creditors. The plan will include the fee owed to the Chapter 13 Trustee. Monthly payments must not be missed. If a debtor misses payments, the Chapter 13 Trustee has the right to ask the bankruptcy court to dismiss the case for non-payment. A dismissal means no debts are discharged and the debtor is in the same position as before the bankruptcy filing.
In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) to remedy perceived abuses in bankruptcy filing. One such remedy was the “means test” which reviews the debtor’s income to determine whether they qualify to file a Chapter 7 case or whether the debtor must file a Chapter 13 case.
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A bankruptcy attorney can help protect homes, cars, personal belongings, and retirement accounts by getting them correctly qualified as exempt property. If there are portions of assets which are non-exempt, a bankruptcy attorney can help arrange a payment plan that works for the client.
At Jorgensen, Brownell & Pepin, P.C., we strive to provide insightful and compassionate service backed by extensive experience, and we know it can make the difference for people struggling with debt. If you have questions about your current financial situation, debt relief options, and how attorneys can help you, do not hesitate to take the first step toward financial freedom by reaching out to our firm for help.