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The Different Types of Bankruptcy

types of bankruptcy
Posted on: January 12th, 2019 by: Amanda Daniels  Topic: Bankruptcy

Originally Posted: November 27, 2017
Updated: January 12, 2019

Many consumers speak with an attorney regarding the types of bankruptcy they can file. While there are many, usually consumer bankruptcies fall under Chapter 7 or Chapter 13.

During the time in which the consumer undergoes one of these bankruptcies, they are required to undergo counseling, as well take as a series of other steps including money management classes. In most cases, filing for bankruptcy will cause those harassing phone calls from the debtors to stop. This is because it puts the debt in a stay state, not allowing the debtors to touch them in the process. Each type of bankruptcy is used for a specific type of problem; read below to learn more about each.

Chapter 13

Purpose: Adjusting debts for a person with a constant source of income who desires to pay their debts but is currently not able to do so.

This is a bankruptcy plan that works with current debts in order to try and make achievable payment amounts that help you catch up. The goal is not to eliminate all debt, but to instead do one of the following:

  • Formally restructure debt payments to make them achievable given your current income level.
  • Get rid of a portion of your debt so you can manage payments for remaining debt.

The above can be done in a variety of ways: spreading debt payments over a longer time period or paying for only part of a loan. Both ways reduce your weekly or monthly payments on debts such as auto loans, home loans, or other secured loans.

During the negotiations, a creditors meeting will be held to negotiate payment amounts. If the creditors agree to your plan it is more likely the judge will accept it. If the creditors will not agree to your plan, the judge can still approve it if he or she considers it to be fair to all creditors involved. To decide if it’s fair the judge will look at two factors:

  1. Whether your creditors are being treated fairly in the agreement
  2. If each creditor will receive as much or more money compared to what they would have received had you filed Chapter 7 bankruptcy.

Once the judge approves a payment plan, creditors usually agree to the amounts that are given and they are not allowed to freeze any assets, garnish wages, make any harassing calls, or even take any action against the debtors during this time. A trustee appointed by the judge will keep a watchful eye on your finances during the agreed upon time period.

At the end of the term, usually 3 to 5 years, the remaining amounts of the debts are discharged, and the debtor can have a fresh start without losing any of their assets in the process.

Why people choose Chapter 13 bankruptcy:

  • They are behind on car or house payments
  • The debtor is usually allowed to keep a valuable asset such as their house or car
  • They have years of unfiled taxes
  • They have debt that cannot be discharged under Chapter 7 Bankruptcy like child support or taxes
  • They have liens whose value is larger than that of the asset that secured the debt
  • The worth of their assets is more than any exemptions that are available

Chapter 7

Purpose: To discharge (eliminate) all debts because you are unable to maintain any payment schedule. You will lose assets in this type of bankruptcy and have a financial fresh start once the process is complete.

Chapter 7 Bankruptcy is the most commonly filed form of bankruptcy, commonly referred to as “liquidation,” “straight bankruptcy,” or “complete bankruptcy.” It is used in situations where repaying any of your debts is not possible, no cosigners are involved, or creditors are threatening imminent court action.

Unlike a Chapter 13 bankruptcy, a Chapter 7 will end up in the loss of assets; you will either pay for or give up your property for which you can’t make payments. You surrender all property that is nonexempt in order to pay off as much as your other debt as possible. This is known as liquidating assets. You are allowed to keep exempt property and are released from all obligation to repay your remaining dischargeable debt.

To file for Chapter 7 Bankruptcy, you will complete a form which compares your current debt to your income and allows the court to determine if you do not have sufficient income to pay off at least a portion of your debts. If it determines you do not have sufficient income, this gives the judge the authority to seize and sell assets to pay back some of the debt.

Examples of assets that are collected and sold are items such as luxury yachts, homes, vacation items, and other items of worth. If the sale of the item is not going to significantly benefit the debt, then the item is not going to be seized. Cash from the sales is then distributed to creditors.

In most cases, once the process is complete the debtor receives a discharge releasing her or him from personal liability of the discharged debts.

Chapter 20

A Chapter 20 bankruptcy is when someone files for Chapter 13 bankruptcy after completing a Chapter 7 bankruptcy. It allows the debtor to first discharge unsecured debts through a Chapter 7 and then catch up on mortgage payments or pay off non-dischargeable debts using Chapter 13. Chapter 20 can have many drawbacks so make sure you discuss this option with your attorney to fully understand it before making a decision.

Contact a Professional Attorney

Bankruptcy is a serious step; it’s critical to consult with an expert to be sure you choose the option that is best for your specific financial and life situation. The knowledgeable and professional team at Amanda Todd Daniels will draft a plan, negotiate with your creditors, and handle the legal process so that you can focus on other areas in your life.

During your first consultation with Amanda Daniels, she will go over your financial situation in detail to determine if filing for bankruptcy is a viable option for you. Contact her today at (662) 678-8009 to request a consultation.

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