There are several kinds of protection for those in debt under the bankruptcy code. The bankruptcy code is a “book” divided into chapters. The chapters in the book are the chapters used in bankruptcy.
You must qualify to file a bankruptcy petition. Some persons are not eligible for a certain chapter under the bankruptcy code. The kind used most frequently is a Chapter 7 bankruptcy, sometimes called “straight bankruptcy,” which is a liquidation program. Under the bankruptcy law passed in 2005, only certain people qualify for protection under the Chapter 7 program. If your household earns more income than the average median household, you may not qualify.
When someone files for a Chapter 7 bankruptcy, the court may completely relieve that person from their debts. Some debts cannot be discharged and don’t go away. These debts include most taxes, domestic support obligations and student loans. The court may also use some or most of the property that the person owns to pay back their creditors. Therefore, only someone that does not have a great amount of property or income generally files for a Chapter 7 bankruptcy.
The second kind of bankruptcy that is often used is called a Chapter 13 bankruptcy, and is a debt consolidation program. Only individuals qualify to file a Chapter 13. An individual business organization termed a sole proprietorship may file a Chapter 13 as well. Rather than completely eliminating someone’s debt, the court supervises the repayment of a certain portion of their debt for a period of 3 to 5 years, during which that person will pay their creditors through the court system rather than directly. In exchange, that person is allowed to keep certain property that they are behind on paying for and might lose in a Chapter 7, most frequently a home mortgage. A person or married couple are allowed to schedule and pay off debt according to their ability. A Chapter 13 is limited to a certain amount of debt.
Individuals may file a Chapter 11 if they have more than a certain amount of secured or unsecured debt. This third kind of bankruptcy is usually a business re-organization program. When you hear about a company filing for bankruptcy, it is more than likely a Chapter 11 bankruptcy, because very few individuals use this kind. A business (or individual) is allowed to submit documents to the Court describing a plan for reorganizing and restructuring debt. Some debt may be modified, other debt reduced and stockholder value reclassified or subordinated. The result is a healthier business better able to pay off debt over a period of time and give more funds to creditors that the creditor would receive in a Chapter 7 liquidation.
What kind of bankruptcy should I use?
Which kind someone should use depends on their financial circumstances. The first thing that must be determined is whether they pass the means test. This test compares that person’s income to the income of everyone else in their state to find the amount of disposable income they have. If that person has more than a certain amount, they are required to file a Chapter 13 bankruptcy.
To “pass” the means test means you earn less money compared to the average.
The next step is to determine what kinds of property that person has. If they pass the means test, do not own a home, and only have basic property like an automobile, a Chapter 7 is most likely the best option. Even if someone passes the means test, it still might be best for them to file at Chapter 13. For example, if they have property with a significant value, like a home with equity, a bankruptcy trustee will sell it to repay that person’s creditors in Chapter 7 bankruptcy.
If it seems like it would best to file a Chapter 13, the attorney must determine whether or not the person is able to enter into a Chapter 13 plan. In order to qualify for protection under Chapter 13, the person must be able to meet basic monthly expenses through a budget and still have some money left over every month to pay their creditors back. If they do, then their debt is added up and the number of months and amount each month they must pay is calculated. Some debt can be modified, reduced or eliminated altogether to make the plan feasible to allow the person to keep important assets such as a house or car.