What are the different types of bankruptcy?

There are four different chapters of bankruptcy that can be filed by individuals. Chapter 11 is generally used by corporations or individuals that have more than $1,149,525 of secured debt or more than $383,175 of unsecured debt. Chapter 12 is a re-organization for a family farmer or fisherman. The most frequent types of bankruptcy filed by individuals are Chapter 13 and Chapter 7.

What is Chapter 13?

Chapter 13 is a personal reorganization. Under Chapter 13, individuals and small unincorporated businesses make some payments to at least some of their creditors over a three to five year period of time. Often, those in Chapter 13 have to pay back only a small percentage of their unsecured debt. Chapter 13 is a specialized bankruptcy and is generally used in one of the following situations.

Use of Chapter 13 to keep things that would be lost in a Chapter 7

If you wish to keep things {like real estate that is worth more than the amount you are allowed to keep (exempt) in a Chapter 7 bankruptcy} you can file a Chapter 13 bankruptcy, keep everything you own and instead make payments equal to the amount of your assets that cannot be exempted under a Chapter 7, to your unsecured creditors such as credit cards and utility bills. For example, if you and your spouse own a home with more than $45,950 equity (that is worth more than $45,950 than the balances of any mortgages on it) and you wish to keep your home, a Chapter 13 can be used to do this.

Use of Chapter 13 to prevent Sheriff and tax sales

Chapter 13 is used by persons who have a secured asset, typically a home which they wish to keep, with a mortgage or property taxes on which they have fallen far behind in their payments and need time to get caught up. Chapter 13 gives them three to five years to gradually get caught up on the back payments, keep their house and stop any sheriff or tax sale.

Use of Chapter 13 to eliminate/reduce certain debts

Chapter 13 can be used to "cram down" the amount you would have to pay on certain debts secured by a mobile home, time share or vehicle when the loan is older than 910 days where you wish to keep the item but the balance of the loan is substantially higher than the value of the collateral. In this instance, under Chapter 13, you can reduce the amount of the loan that has to be paid to the value of the collateral at the time you file the bankruptcy plus reasonable interest by making smaller monthly payments under Chapter 13 than the payments due under the original loan agreement and keep the item. Chapter 13 can also be used to eliminate secondary mortgages when those mortgages are completely under secured (the balance owed on the first and any other earlier mortgages exceeds the value of the property).

Use of Chapter 13 for higher income individuals

Bankruptcy law establishes a "means test" against which is compared your household income. If the result of the means test is that you have sufficient income available, after deducting certain mandated expense allowances and other expenditures, to pay back a significant portion of your unsecured debt, you would not qualify for Chapter 7 but instead could file a Chapter 13 to wipe out some of your debt and stop any interest and penalties from accumulating by making payments to a Trustee over 5 years.

Use of Chapter 13 for previous filers of Chapter 7

The law requires a minimum time period between the filing of bankruptcies that result in a discharge. For example, there must be 8 years between the filing of 2 chapter 7 bankruptcies. The allowable time between the filing of a chapter 7 and chapter 13, however, is only 4 years. Therefore people who have successfully completed a chapter 7 filed more than 4 but less than 8 years ago who are currently having debt problems can file a chapter 13 and often get rid of most of their current unsecured debt.

What is Chapter 7?

If your situation is not like one of those mentioned for Chapters 13, 12 or 11, Chapter 7 would be appropriate for you. Under the means test previously mentioned under higher income individuals, if the annual income, excluding social security, of a 1 person household is under about $47,000; about $56,000 for a 2 person household; under about $70,000 for a 3 person household; or under about $82,000 for a 4 person household, you will qualify for a Chapter 7.

A typical Chapter 7 allows people to keep everything they own, including their home, vehicles, furniture and their bank accounts and have their unsecured debts, such as credit cards, medical bills and back utility bills wiped out.

With regard to secured debts such as mortgages and vehicle loans, it generally gives you two options. First, if you keep your payments on the loan current and pay it off as if you never filed bankruptcy, you can keep the collateral (car or house). Second, you can elect to surrender or give back the collateral to the secured creditor, not make any further payments and wipe out the obligation. Only you can make one of these choices for each of your secured debts; your creditors cannot make you give back something on which you keep your payments current. Security which is obtained by a creditor suing and getting a judgment lien against real estate, bank accounts or household items generally can be eliminated by the filing of a motion in a bankruptcy.

Go BACK to the Previous section

Go FORWARD to the Next section