30+ Years of Bankruptcy Experience

A:

Bankruptcy is a legal right provided under the U.S. Constitution that allows individuals who cannot repay their debts to either

• reorganize their debts by lowering monthly payments and/or reducing amounts owed or
• eliminate their debts.

A:

There are four (4) types of bankruptcies, each of which is called a “Chapter”:

• Chapter 7 bankruptcies allow debtors to get rid of all or almost all debts. “Almost” because certain types of debts like child support and alimony are never discharged. Others, like student loans can be discharged, but only in unique instances where debtors can show that it would be an “undue hardship” to repay.
• Chapter 11 Bankruptcies are corporate reorganizations, filed by such entities as K-Mart Corp. or Northwest Airlines. Although there are unique cases where individual debtors can file Chapter 11, this type of bankruptcy is usually filed by businesses.
• Chapter 12 Bankruptcies are filed by farmers and fishermen.
• Chapter 13 Bankruptcies are personal reorganizations. Debtors take the difference between what they “net” per month out of their paychecks and what their average monthly living expenses are and contribute the difference into a “Plan” that can last up to five (5) years. The length of the Plan is determined by the debtor’s annual household income. At the end of the Plan, what is paid is paid and what is not paid is, with certain exceptions, eliminated (discharged).

A:

In order to qualify for Chapter 7, you must prove that you are unable (as opposed to being unwilling) to repay your debts. In other word, you do not have enough money left over at the end of the month to meet reasonable and necessary living expenses and at the same time repay your debts.

In addition, you may qualify for Chapter 7 in the respect that you do not have enough money to be able to both live and repay your debts, but elect not to file Chapter 7 because you may then lose assets to your creditors. Under Chapter 7 you are only able to protect certain assets needed for a fresh start. For example, an individual filing alone can protect up to $25,150 of equity in real estate. If, however, said individual has more than $25,150 of equity, then the bankruptcy trustee can take the house, sell it, pay off any money owed on it, give the debtor a check for $25,150 and the rest goes to creditors.

In such an example, the debtor may not want to file for Chapter 7, even though he qualifies.

Chapter 13’s are filed by debtors for any number of reasons:

• a debtor may make too much to qualify for Chapter 7, but at the same time cannot afford to repay his debts in full. So the debtor would file a Chapter 13 Plan, pay back what he can afford to pay over a Plan that can last up to 60 months, and eliminate what is not paid;
• a debtor may have fallen behind in mortgage or car payments. His financial situation has now improved to the extent that he can make his current monthly payments but cannot catch up on arrearages in a “lump sum” typically required by creditors. Chapter 13 allows the debtor to catch up on these arrearages over time.