How does personal bankruptcy work for individuals?
There are three prominent Chapters of the Bankruptcy Code that individuals can utilize to file bankruptcy. Personal bankruptcies are most commonly filed under Chapters 7, 11, 13 and less commonly Chapter 12.
Find the right fit for your bankruptcy needs:
One of the most important steps in determining if bankruptcy is right for you is to determine which chapter best fits your circumstances. Each chapter has different rules and benefits. Choosing the right chapter is an important part of any bankruptcy case, and it is a decision that should be made with careful and candid consultation with an attorney.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is often referred to as a “liquidation” bankruptcy or “Chapter 7 liquidation”. In Chapter 7, the individual debtor is seeking a discharge of their debts. It is referred to as a liquidation because any of the debtors non-exempt property is liquidated to pay the Debtor’s creditors. (Learn more about exemptions here). Chapter 7 debtors must have income levels below a certain threshold depending on their household size, expenses, the state they live in, and other factors.
What happens to my home and car in bankruptcy?
In a Chapter 7, most unsecured debt is completely wiped out. Common examples of unsecured debts are credit card bills, medical bills, etc. (any debt that is NOT tied to property). However, some unsecured debts are nondischargeable (i.e. most student loans and most taxes).
The downside of Chapter 7 is that secured debts (i.e. car loans, home mortgages) are not wiped out. The debtor must continue to pay on secured debts if they want to keep the property. However, they have the option of surrendering the property to the creditor who holds the debt. Any personal liability on a secured debt IS discharged by filing a Chapter 7 bankruptcy. Since the lien remains in place on the property, a debtor must pay the obligations according to the original contract terms if he or she intends to keep the property such as a car or a house.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is structured repayment plan of some or a portion of the individual debtor’s debts. The debtor must pay all “disposable income” for a period of three to five years in order to qualify for a discharge. The court must approve the plan, and any unsecured debt that is not paid off in the plan will be wiped out by a discharge order that the court will grant when all the approved plan payments have been made..
Catching up on mortgage payments and car notes is an option under Chapter 13 Bankruptcy
Secured debt must be paid in their normal monthly payments (either through or outside of the plan). Debtors can use the plan to pay any arrears and late fees on car loans or home mortgages over the plan payment period, making it much easier for debtors to catch up on their secured debts.
Chapter 11 Bankruptcy
Chapter 11 Bankruptcy is similar to Chapter 13 in that it allows debtors to create a repayment plan that proposes to pay some or all of the debtor’s debts over time. Often corporations, limited liability companies, and other businesses file under Chapter 11 . Individuals may also file under Chapter 11, and it is sometimes the only option for individuals that have debts of an amount in excess of a debt maximum under Chapter 13.
Chapter 11 Bankruptcy offers individuals flexibility but the costs and reporting requirements are more substantial
A Chapter 11 can provide more flexibility than a chapter 13, yet at the same time the debtor has additional responsibilities under Chapter 11. Chapter 11 debtors are required to file monthly financial reports during the restructuring period and the fees and expenses are more than the costs of a Chapter 13.
Chapter 12 Bankruptcy
Chapter 12 Bankruptcy is similar to Chapter 13 for “family farmers” and “family fisherman”, with additional benefits to debtors. Chapter 12 makes up a very small portion of the bankruptcy cases filed each year but is available if individuals meet the criteria of being designated a family farmer or family fisherman.
Choosing under which chapter to file bankruptcy is an important part of each bankruptcy case. Different chapters contain different restrictions and different benefits. The information above is general in nature, and you should speak to a licensed bankruptcy attorney in your jurisdiction before filing bankruptcy.
DISCLAIMER: The information contained above is general in nature and provided as reference material only. This information is not specific legal advice about the application of the law to a particular fact scenario, nor does it replace (or purport to replace) any requirement to obtain specific legal advice. This information is not intended to and does not create an attorney client relationship. If you require legal advice, that advice should always be obtained from a qualified legal practitioner in your jurisdiction.