Bankruptcy Protection: Chapters 7, 11 & 13





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Published on Mar 21, 2011


If you are facing a bankruptcy, it is important to know how the law views your choices. Most people choose between either Chapter 7 and Chapter 11 bankruptcy, as Chapter 13 is for debtors who own a business, and want to file for bankruptcy without placing their business at risk. A feature of bankruptcy is an automatic stay that requires creditors to immediately stop all actions to collect a debt, take possession of collateral, enforce a lien, or collect receivables. As a caution, if you believe you are going bankrupt, it is not a good idea to max out all of your credit cards right before doing so. The court sees this as abuse and may not allow you to include those debts in your bankruptcy. In general, bankruptcy judges have become harder on people because there have been so many abuses to the system.

Chapter 7 bankruptcy involves liquidation. Your monthly income must be equal to or less than the median income for your size of household in your state. You can locate this number at census.gov. If you are eligible, you can liquidate your prior debts and start over. You will lose some of your property, but will be allowed to keep part of the equity in your home, a reasonable amount of clothing, a few hundred dollars worth of jewelry, and your pension. While various states have different rules about what you can keep, in general, you are able to retain items needed for daily living. The remainder of your assets will be liquidated for distribution to your creditors, who mostly receive only a small percentage (if any) of what is owed them. Certain debts are not dischargeable and survive bankruptcy, such as some income taxes that accrue prior to bankruptcy, alimony and child support payments, criminal fines, student loans, and fraudulent debts. Also, you can not apply again for a Chapter 7 bankruptcy for six years. The current fee for filing is $245 plus about $54 for other fees. Legal fees can range from $1,200 to $1,400.

Chapter 11 bankruptcy normally allows continued control of business operations as a debtor in possession, and is subject to the oversight and jurisdiction of the court. This affords the debtor in possession a number of mechanisms to restructure their business. A debtor in possession can acquire financing and loans on favorable terms by giving new lenders first priority on the business' earnings. The court may also permit the debtor in possession to reject and cancel contracts. Debtors are also protected from other litigation against the business through the imposition of an automatic stay. While the automatic stay is in place, most litigation against the debtor is stayed, or put on hold, until it can be resolved in bankruptcy court, or resumed in its original venue. If the business's debts exceed its assets, the bankruptcy restructuring results in the company's owners being left with nothing; instead, the owners' rights and interests are ended and the company's creditors are left with ownership of the newly reorganized company. All creditors are entitled to be heard by the court. The court is ultimately responsible for determining whether the proposed plan of reorganization complies with the bankruptcy law.
Chapter 13 bankruptcy is a repayment plan that allows people with a regular income to make a plan to pay some or all of their debts. You propose a repayment plan to pay your creditors over a period of three to five years. This plan must be approved by the bankruptcy court. If it is, you will be able to reschedule secured debts to make them more payable. Any remaining disposable income must go to paying off unsecured debts, such as credit cards. Usually you don't have to pay off these debts in full. A downside of this type of bankruptcy is that many people are unable to follow through with the plan and have to convert to a Chapter 7 bankruptcy. An upside is that Chapter 13 allows you to eliminate, reduce, or pay major nondischargeable debts over an extended period of time. It also includes taxes payable. Certain asset classes are protected that would be lost in a Chapter 7 filing. A Chapter 13 bankruptcy stops interest charges on your account. Future creditors may view a Chapter 13 bankruptcy more favorably than a Chapter 7 bankruptcy, because you are making an attempt to pay off your debts. Currently, the fee for filing is $235 plus $39 for other costs. Legal fees can range in the area of $3,000.

The Bankruptcy Reform Act of 2005 requires you to receive credit counseling before filing for bankruptcy. A competent non-for-profit counselor can help you determine if bankruptcy is right for you. By making a debt management program with the counseling agency, you might be able to avoid filing for bankruptcy. In the long run, this will be better for both your credit score and your assets.


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