Chapter 7 liquidates your debts and assets while Chapter 13 is a reorganization of your debts. The main difference is that in Chapter 13 you will repay a percentage of your debt over three or five years.
Chapter 7 is probably advisable if:
— Your debts are primarily unsecured and dischargeable (credit cards, medical bills, personal loans)
— You have little or no non-exempt property
— You need not cure defaults to retain secured property
— You do not have disposable income that could fund a Chapter 13 plan
Chapter 13 is probably best if you:
— Have non-dischargeable debts (alimony, child support, taxes, fines and penalties, student loans)
— Want to retain non-exempt assets
— Want to cure a mortgage or car loan default
— Have high net disposable income
You must prove, by passing a means test, that you are not capable of repaying your debts. You or your attorney will complete a form called Statement of Current Monthly Income and Means Test Calculation, which will analyze your income and setoffs to determine what can be paid to creditors.
This form looks at average income from all sources for the last six months. If both you and your spouse are filing for bankruptcy, both of your incomes are counted. If only you are filing, your spouse’s income will be included subject to some setoffs.
At least one day and no more than six months prior to filing for Chapter 7, you need to obtain credit counseling from an agency approved by the U.S. Trustee’s office. The counseling will help you learn whether you really need to file for bankruptcy, or whether an informal repayment plan might suffice. You only need to obtain a certificate of completion; you need not follow the agency’s advice.
Prior to discharge, you must attend a two-hour course on managing finances. You must take this course from an agency approved by the U.S. Trustee Program.
An automatic stay issues, which is a court order forbidding your creditors from contacting you. This means the collection calls and letters will immediately cease.
This relief comes with a pitfall. If you want to stay current on a particular debt, say a car loan, you will no longer receive a monthly statement reminding you to make the payment. You will need to set up your own reminder system for each debt you want to continue timely paying.
You will go to a creditor’s meeting, which in most cases occurs about a month after you file. The meeting is held in the trustee’s office. Most trustees are experienced bankruptcy lawyers. The atmosphere is less formal than a trial, and the meeting is short — frequently less than 15 minutes. No judge is present, and you are not cross-examined.
The trustee will ask you to affirm under oath that you (a) accurately valued all listed property, (b) listed all your property, and (c) have not improperly transferred property or money to a third person. The trustee may also ask you how you came up with the listed values for your home, car, and other property.
The vast majority of meetings go smoothly. When problems do arise, they usually fall into these categories:
1. Transfers to family members within two years of filing. If you borrowed money from family and have made loan payments, the trustee can force the recipient to give up the payments. The money is then distributed to creditors.
2. Large payments to one creditor near in time to the petition filing. The trustee does not want one creditor favored over another, and so may redistribute large payments made prior to filing.
3. Loan application values differ. If you or a loan broker pumped up asset values on a loan application, a creditor could ask you some embarrassing and troublesome questions. Blaming the loan broker will not get you past the fact that you signed the application.
Audits occur in a small percentage of bankruptcies. If you have an expensive home but put a low value on your furnishings, the trustee may send an auditor to your home. A random audit may require you to submit bank statements with explanations of large deposits and withdrawals.
A creditor may challenge your discharge if you went on a spending spree prior to filing. Maybe you took an expensive vacation or bought some pricey personal items. Creditors can challenge these debts.
Occasionally a purchaser of your debt may try to collect post-bankruptcy. Sometimes a lender will refuse to grant a loan unless you can prove that a prior debt was discharged in bankruptcy. Providing a copy of your discharge letter and petition will usually resolve these issues.