What’s the difference between Chapter 7 and Chapter 13?

Chapter 7 and Chapter 13 are different tools that are used to handle different financial problems. Chapter 13 is a debt consolidation plan used to repay debt in full or in part over a period of years. Chapter 7 is a fresh start or liquidation case that is usually finished after only a few months.

In Chapter 13, you can force secured creditors like mortgage lenders or car lenders to allow you to cure defaults over time, whether they agree or not. In Chapter 7, unsecured debts are discharged without payment, and you indicate your preference (intent) as to whether or not you want to “reaffirm” and keep paying your secured creditors. Alternatively, you may surrender the collateral and discharge the debt. If you are behind on secured debt, the secured creditor can require you to surrender the collateral in Chapter 7, unlike in Chapter 13. If you are current in your payments, secured creditors almost invariably will want you to “reaffirm” their debt.

What are the benefits of filing bankruptcy, and when do those benefits start?

The benefits start automatically the instant the case is filed electronically. Bankruptcies will stop the filing or continuation of lawsuits, harassing phone calls, garnishments, foreclosures, and repossessions instantly as a matter of law.
We usually file cases on the same day that you first come in if:
1) you have all the information we need,
2) you understand your options and are clear about what you want to do,
3) your situation is one in which a bankruptcy will help you, and
4) you have the filing fees needed to file the case (that depends on the kind of case you
are filing, and you’ll need to ask about it)

Do you lose your property when you file Chapter 7?

Hardly ever. In Chapter 7, the Court is not interested in your property except to the extent that it has equity in it… that is, to the extent that it is worth more than what you owe on it. (To the extent of any lien on it, it really belongs to the creditor. Thus, the value of your property is important). You are allowed to protect (“exempt”) your equity in property up to certain dollar limits in different categories of property, such as in your residence, your automobiles, your household goods, etc.
The vast majority of Chapter 7’s are “no asset” cases where nothing is lost or surrendered. If you have substantial equity in something, you would want to bring it up and discuss it with the lawyer before you file to see if it might cause a problem. If you are subject to losing something in Chapter 7 that you don’t want to lose, then Chapter 13 may be your best option.

Can I leave debts out of my case if I want to?

No. But that does not mean that you will lose the property. For example, mortgages are listed Chapter 13, but unless you choose to surrender the property, you would continue to pay the mortgage directly as those payments come due in the future. In Chapter 13, you also list debts that you can’t discharge without payment, such as student loans (see below).

In Chapter 13, you also list all co-signed debts (see below), whether your name is listed first or second. Then, in your plan, you indicate whether the co-signer is going to pay the debt or whether you are.

In Chapter 7, you would also list the mortgage and all other secured debt, regardless of your “intentions” with regard to what you want to keep. If you are “reaffirming”a secured debt, that is, keeping the property and continuing to pay the debt on it, then you list the debt in one place, and indicate your intention to keep the property in another place. Alternatively, you may list the debt and indicate that you intend to surrender the property and discharge the debt without payment.

Are there some kinds of debts that I can’t bankrupt on?

Yes. In Chapter 7, there is a short list of “non-dischargeable” debts that will pass through bankruptcy without being discharged. Some common types are child support, student loans, and recent taxes. Less common types include drunk driving debts and debts incurred by fraud.

Chapter 13 is often used to repay “non-dischargeable” debts over time under the protection of the court. Thus, you can repay past due taxes, past due child support, and student loans through Chapter 13, even though you can’t discharge those debts without payment.

In Chapter 13, what are “plan payments”? How much are they, and when do they start?

“Plan payments” are payments established in your plan that you prepare with the lawyer. You will make these payments each pay day to the Chapter 13 Trustee, who in turn pays your creditors. Creditors are required to look to the Trustee for payment, and can not collect from you directly (with a few exceptions, such as mortgages and leases: see below).

Plan payments are used to pay debts (other than current mortgage payments), such as cars, furniture, credit cards, etc. Chapter 13 lowers your contractual payments because these debts are usually paid slower than they would be under the contract. In Chapter 13, no interest is paid on unsecured debt, and in some cases, unsecured debts may be paid less than 100 cents on the dollar. Secured debt is paid with modified interest that is usually lower than the contract rate.

The amount of your plan payments depends on two things. One is the amount of debt you are paying through your plan, and the other is your ability to pay. The amount is carefully worked out with your lawyer so that the amount works for you, and also will work for your creditors. It’s a question of balance.

Plan payments start accruing as soon as the case is filed. Thus, one month after the case is filed, you will owe one month’s worth of payment.

How are mortgages treated in Chapter 13?

Most mortgages take longer than the five years to pay, and therefore, mortgages are normally paid directly. In the usual case, you will make mortgage payments each month in the regular amount as they come due in the future. In Chapter 13, only the “arrearage” (amount needed to bring the mortgage current as of the date of bankruptcy) is paid “through the plan”. The Chapter 13 Trustee catches up the “arrearage” over time with your “plan payments”.

Can my payments change in Chapter 13?

Yes. Your payments can either go up or go down after the case is filed. Changes are usually based on a change in income or expenses (such as when you change or lose your job). However, how much debt you are repaying during the plan is a factor that comes into play in changing the payment, and this may restrict what you can do. You have to discuss your specific situation at the time of a change with the lawyer to see exactly how this will work for you.

If a debt is co-signed, can I protect the co-signer?

You can protect co-signers in Chapter 13 if you provide in your plan that you will pay the debt in full with interest through your case. (Alternatively, your plan could provide that the co-signer is going to pay the debt and that you will not pay it in your case. This may not be advisable in your specific case, and would not protect the co-signer if the loan were in default).
In Chapter 7, co-signers are not protected. (This is one reason why Chapter 13 is sometimes to be preferred over Chapter 7). Thus, if you and a co-signer both owe a debt, and if you file Chapter 7 in your name alone, then you (as “the debtor”) will be discharged, but the non-filing co-obligor will continue to owe the debt. Of course, if you are keeping (“reaffirming”) a debt in Chapter 7, then the co-signer will be “protected” under state law so long as payments are not in default.

What happens if I can’t make my Trustee payments in Chapter 13?

In a worst case scenario, your case can be dismissed, and you lose the benefits of bankruptcy. This does not mean that your property will be forfeited. Your relationship to your creditors simply returns to being governed by state law. You owe debts to the extent that they have not been paid, and creditors go back to having state law “remedies” such as repossession or garnishment.
If your inability to pay is temporary, a request can be made to the court for a limited suspension of the obligation to pay, and, as noted above, sometimes your payments can be lowered. Once again, the amount of debt being paid, and the time you have left on your plan may restrict what you can do in this regard.

What happens if I don’t make my mortgage payments after Chapter 13 is filed?

If your regular mortgage payments fall behind after you file your case, your mortgage lender may file a motion requesting “relief from the automatic stay”. In that case, they are asking the court to remove the protection that it initially provides so that the mortgage lender can foreclose. A hearing is assigned on this type of motion. It is usually resolved in your favor (without foreclosure) if you catch up, or if you pay in part of the default and come to a mutual agreement with the lender to allow you to catch up the rest of the default over a period of months. It is important to assist the lawyer to reach the best result in these situations.

How long does a Chapter 13 last?

It may last less than five years, but it can’t go over five years. To make your payments as low as possible, the plan often lasts close to five years. Exactly how long a case will last will depend on the amount of the claims filed by the creditors, how fast you are paying the Trustee, and the nature of your plan. You’ll need to ask the lawyer after all claims have been filed to get a more definite time frame in your specific case.

Do I lose my tax refunds if I file Chapter 13?

If you are paying all of your debts in full under your plan, you may keep all tax refunds. If you are not paying your unsecured debts in full, you will have to pay in tax refunds unless you can show the court why it is more important that you keep the money rather than have it used to pay your creditors. As always, the court will balance your right to relief against the right of your creditors to be paid the money that is owed to them.

How would filing bankruptcy affect my credit?

Filing bankruptcy will hurt good credit, but it won’t hurt bad credit. If you’re reading this, then probably your credit is not good enough to solve your problems by borrowing money. In fact, most debtors already are in some stage of a lawsuit, or they have a repossession or foreclosure, or they are just falling behind in their payments. Any of these events will hurt your credit, and usually people simply do not have the option of having perfect credit, regardless of what they do. Consequently, the effect of bankruptcy on your credit is usually not the determining factor as to whether it would be a good idea to file.

It is also true that you can borrow money after you file either a Chapter 13 or a Chapter 7. In Chapter 13, a debtor has to get court approval (by filing a motion) to take out a loan, but this is not hard to receive so long as the specific purpose is necessary and reasonable. In Chapter 7, court permission is not normally required after you file (such as when you want to buy a car to replace the one you’ve decided to surrender). When in doubt, you should always ask the lawyer.

Can I reduce my mortgage payments by filing bankruptcy?

You can’t reduce payments on your first mortgage under present law. Sometimes you can “strip” a second mortgage (remove the lien and treat the debt as unsecured) where the value of the property is less than the amount owed on the first mortgage. In Chapter 13, you have to successfully complete your plan before a second mortgage is permanently “stripped”. This is a changing area of the law, and should be dealt with cautiously.

Of course, even a first mortgage can be reduced by “modification”. This is basically a mutual agreement between you and the mortgage holder to change your note. Modifications during a Chapter 13 are not rare. They do require court approval however, because how much you pay one creditor usually affects how much you should pay other creditors.

May I sue someone or continue a lawsuit against someone after I file?

Lawsuits where you may recover money are “assets” in either Chapter 7 or in Chapter 13. Thus, you have to disclose the suit in your paperwork (including class actions). In Chapter 7, the Trustee may keep all or part of a recovery, and may prosecute a suit as he sees fit. The amount that you can keep will depend on the amount that you can “exempt” (see, question 3, above). You should discuss this kind of “asset” with the lawyer before filing because hiding assets can be “bad news” for all involved.
In Chapter 13, the lawyer in your non-bankruptcy suit has to be approved by the court, and you may have to pay part or all of any recovery into the case to pay creditors. That question is resolved after the suit is settled by a motion filed with the court. You have to discuss your specific situation with your lawyer to get a solid understanding of how you may be affected.

Can I file business debt under in my bankruptcy?

If your business is a corporation, then it is a separate legal entity that owns its own assets and owes its own debt. If a business is not incorporated, then all the debt owed and all the assets owned are regarded as personal to the business owner. With this in mind, you may discharge debt that you owe personally in Chapter 7, or you can repay it in full or in part under the usual rules in Chapter 13. However, corporate debt cannot be discharged as to the corporation (except by payment).

A corporation may file its own Chapter 7 bankruptcy, but is ineligible to file a Chapter 13. In a corporate Chapter 7, the “automatic stay” will prevent the continuation of adverse creditor actions until the case can be adjudicated by the court. However, the result is merely an opportunity for an orderly liquidation of assets. Thus, creditor actions are “stayed” merely to allow the Trustee time to sell corporate property to pay creditors. The corporation itself will not receive a discharge.

Consequently, when an individual owns a small corporation, it is common for the individual to file a personal case to relieve himself of personal liability (such as the obligation to pay a personal guarantee on corporate debt). The corporation would continue to owe its debts.

However, it may not have any assets, and may not be doing business anymore. If that’s the case, it’s probably not worth the trouble and expense for a corporation to file its own bankruptcy.
An individual with an incorporated or unincorporated business may file Chapter 13 in his individual capacity. In that case, the stock owned in a corporation is an “asset” (that has some kind ov value) which is disclosed like any other asset. The income earned from the business is treated like income from any other source. To determine “net income” from a business, you have to take into account both gross receipts and business expenses. Thus, I requires more work and is somewhat harder to determine income and expenses in a business case than it is in a case where an individual earns a salary or wages. Income and expenses always play an important role in any kind of bankruptcy. You need to discuss businesses face to face with a lawyer to get a feet of how bankruptcy may or may not help with your specific problems.