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by Chris A SmithThere are two different bankruptcy procedures for individuals. These proceedings are known as Chapter 7 and Chapter 13. While you may be familiar with the term Chapter 11 from the news, that chapter applies to business owners only.
In October 2005 Congress changed the bankruptcy laws making it much more difficult to simply walk away from personal debt. The new law essentially says pay back the debt through a court approved payment plan and you can keep your house and some other property (Chapter 13); or sell everything you own, including your property, to pay what you can to discharge your debts (Chapter 7).
If a person opts for Chapter 7 they are essentially agreeing to liquidate all of their belongings and property, with the exception of work related tools and some basic household goods, to pay back the debtors. This is called a straight bankruptcy. To insure that the debtor does not profit from this discharge of debt, the law puts a restriction on how much the debtor can earn while the bankruptcy proceeds.
There is another significant difference between Chapter 7 and 13. With Chapter 7, a person must wait eight years before they are able to file it again. Chapter 13 has only a two year waiting period before a person can refile.
Both Chapter 7 and Chapter 13 can eliminate unsecured debt, stop foreclosure proceedings, and halt collection processes. The differences lies in the way that those debts are discharged. Some debts such as alimony, child support, student loans and some taxes are exempt from the bankruptcy proceedings and cannot be eliminated.
Unless you have an acceptable plan to satisfy your debt under Chapter 13, the court usually will not allow you to keep property when the creditor has security lien on it. This could include your home as well as well as boats, vacation homes, recreational vehicles etc.
As part of the new law, persons seeking to file under either chapter have to have attended a government approved credit counseling course within six months of filing. The idea here is to try and solve the credit problem without taking legal action. The second major change just involves Chapter 7. Today you have to satisfy a “means test” to confirm your income does not exceed a certain amount. This amount will vary by state. You can find those limits here.
Bankruptcy is an emotional time but a necessary step for those who absolutely need the relief.
Tags: bankruptcy, chapter 13, chapter 7, credit, debt, finance, law, liquidation, personal finance
