Types of Bankruptcy
The summary listed below is not all inclusive but provides some basic things to know before you file for bankruptcy relief.
On April 20, 2005 and October 17, 2005, major changes went into effect in the bankruptcy laws. Many of these changes impose new requirements on consumer debtors.
Chapter 7-You ask the bankruptcy court to discharge most of the debts you owe. In exchange for this discharge, the bankruptcy trustee can take any property you own that is not exempt from collection, sell it, and distribute the proceeds to your creditors. There are State and Federal exemptions. We will advise you of your exemption entitlements.
Chapter 13 bankruptcy- You file a repayment plan with the bankruptcy court to pay back all or a portion of your debts over time. The amount you'll have to repay depends on how much you earn, the amount and types of debt you owe, and how much property you own. You generally do not lose property in a Chapter 13 bankruptcy because you fund your repayment plan through your income. You must have regular income, although this need not be from a job; regular benefit payments or rental income will qualify. Based on your plan which must be confirmed by the court, the payments are made in regular installments through the trustee who distributes them to your creditors. Plans last either until the debts are paid in full until the end of a three to five year period. The debtor receives a discharge at the completion of the plan, even if the plan does not provide for full payment to creditors. There are debt caps which will be discussed with you at your appointment.
Chapters 7 and 13 are the two most common types of consumer bankruptcies. Your eligibility for them depends on a number of factors including your income and the size and composition of your family.
Chapter 11- Reorganization - used by businesses and a few individuals whose debts are very large. You may continue to operate your business but your creditors and the court must approve a plan to repay your debtors. There is no trustee unless the judge decides that one is necessary; if a trustee is appointed, the trustee takes control of your business and property.
Chapter 12- Like a Chapter 13 but only for family farmers and family fisherman.
You must list all of your creditors on your bankruptcy schedules. You cannot pick and choose. You will need the name and complete mailing address of all your creditors and the last four digits of your account number. Your attorney will discuss what to do about property that you may wish to keep.
Before you can file for Chapter 7 or Chapter 13, you must complete credit counseling with an agency approved by the United States Trustee’s Office. Credit counseling is required even if it’s obvious that a repayment plan is not feasible for you. You are only required to participate, not to go along with any repayment plan the agency proposes. However, if the agency comes up with a repayment plan, you will have to submit it to the court, along with a certificate showing that you completed the counseling, before you can file for bankruptcy. Once your bankruptcy is filed you’ll have to attend another post filing counseling session.
The first step in figuring out whether you can file for Chapter 7 or 13 is to measure your current monthly income (“CMI”) against the median income for a family of your size in your state. Your CMI is your average gross income over the last six months before you file. If your income is less than or equal to the median, it is presumed that you can file for Chapter 7.
If your income is more than the median, however, you must pass "the means test" -- another requirement of the bankruptcy law. The first step is to ascertain your current monthly income (“CMI”) against the median income for a family of your size in your state. If you do not pass the means test then you may need to file a Chapter 13 and pay all your disposable income into a plan. Disposable income is calculated using allowed expense amounts dictated by the IRS—not your actual expenses. Your actual expenses will be used to see if a Chapter 13 is feasible.
When a bankruptcy case is filed, an estate is created comprised of all your property as of the date the bankruptcy petition is filed. The judge will appoint a trustee who will act as the representative of your estate. The trustee's duty is to take possession of your property, to examine claims creditors may file and determine whether they are proper, and to sell the non-exempt property of your estate in order to reduce it to cash for distribution to your creditors.
A few examples of non-exempt property are tax refunds, inheritances within 180 days of filing your bankruptcy, other vehicles you may own, stocks, bonds, additional real estate, in some cases trust income, etc. It is also the duty of the trustee to determine whether you have properly listed all of your assets, whether you are entitled to a discharge of your debts, or whether there is some reason why he or she should ask the bankruptcy judge to deny your discharge. You should understand that in some cases the trustee or a creditor may object to your eligibility to receive a discharge of your debts. Your attorney will discuss this with you.
Some debts cannot be discharged including most taxes, most child support, alimony, or other domestic support obligations, most student loans, court fines, and restitution.