If you are looking at a bankruptcy lawyer’s web site (and I’m glad you’re looking at ours!), you may have heard a little about the bankruptcy process but don’t really know how it works. Here are the basics:
First, you should know that when you file for bankruptcy, you are opening a case in federal court. Everything you include in your petition is filed under penalty of perjury and both you and your bankruptcy attorney must be completely accurate and truthful. Although bankruptcy procedures may seem informal and low key, please understand that your filing of a bankruptcy case is a serious decision with significant consequences and you should not make the decision to file casually or without counsel from an attorney.
You also cannot “cancel” or “undo” a bankruptcy filing once your case has been filed and a case number assigned. Bankruptcy cases are matters of public record and once you file, your credit report will reflect that fact for the next 10 years.
Types of Bankruptcy
The United States Bankruptcy Code sets out several different types of bankruptcies. Each type of bankruptcy is set out in a specific “chapter” of the Code, thus, we refer to “Chapter 7″ or “Chapter 13,” etc. Some types of bankruptcies are very common and others are quite rare. For example, Chapter 9 of the Code sets out the rules for the bankruptcy of a city or county – very few Chapter 9 cases are filed each year.
Chapter 7 and Chapter 13 are the most common types of bankruptcies filed by individuals. Individuals can file Chapter 11, but Chapter 11 relief is much more likely to be filed by a business.
About Chapter 7
Chapter 7 bankruptcy used to be called “straight bankruptcy.” It is the simplest and usually the least expensive type of personal bankruptcy filing. Chapter 7 is designed to wipe out debt and it is usually a good fresh start solution for people with a lot of unsecured obligations, such as credit card debt, medical bills, repossession deficiencies or signature loans.
The minute you file under Chapter 7, the automatic stay goes into effect and a bankruptcy estate is created that includes all of your assets and debts. All adverse creditor action must stop immediately, including wage garnishments, bank account levies, lawsuits, foreclosures and repossessions. A Chapter 7 trustee is appointed to administer your estate. If you own any property that is nonexempt, the trustee will take control of this property and sell it, then use the proceeds to pay some percentage on the dollar to unsecured creditors.
Most Chapter 7 bankruptcy cases, however, are “no asset” cases which means that all of your personal property fits within a bankruptcy exemption (set forth under Georgia law) and that there is nothing for the trustee to sell. This means that the only thing you lose in Chapter 7 are your debts.
If you have secured debts such as a home loan or car loan, you can usually reaffirm those loans so that you can keep your property and continue paying. You can also choose to surrender secured property and walk away from the debt without penalty. In some cases we can use the leverage of your filing to negotiate a favorable debt settlement with creditors in which you reaffirm a secured debt at a lower price or better terms.
Chapter 7 is the most complete form of bankruptcy and it is the fastest as well – most cases are complete within about 5 months – when your case is complete you will receive your bankruptcy discharge.
Unfortunately not everyone qualifies for Chapter 7. In 2005, Congress passed a revision to the bankruptcy law that made Chapter 7 more difficult to file. The 2005 BAPCPA amendment added something called a means test to the Bankruptcy Code. The means test can best be described as a complex formula that looks at your household income and expenses to determine whether you have sufficient “disposable income” that could be used to pay back your debt in a Chapter 13 reorganization.
As a general rule, if you live in a household of 4, and your household earnings exceed $75,000 to $80,000, we may find it difficult (but not impossible) to qualify you for Chapter 7.
If you do not qualify for Chapter 7 or you need a different type of relief, we will consider Chapter 13
About Chapter 13
Chapter 13 bankruptcy operates more like a payment plan than a “wipe out your debts” bankruptcy. When you file Chapter 13 bankruptcy petition, the judge assigns a Chapter 13 trustee to oversee your payment plan. One of your lawyer’s main jobs in Chapter 13 is to create a payment plan that fits all of the numerous requirements of the Bankruptcy Code.
Chapter 13 plans in the Northern District of Georgia must be very specific. We must state how each creditor will be paid, how much that creditor will receive each month and what percentage repayment will go to unsecured creditors.
Here, too, the means test applies, not just in requiring you to file Chapter 13, but the means test results will tell us how much our plan has to pay unsecured creditors.
Chapter 13 case generally last 5 years, during which you pay your Chapter 13 plan payment to the trustee. If you are working for someone (i.e. not self-employed) your Chapter 13 payments must be set up for a payroll deduction. When you complete your payment plan you will receive a Chapter 13 bankruptcy discharge.
Chapter 13 is the type of bankruptcy that works best if you are facing a mortgage foreclosure or vehicle repossession. Why? Because you can include your mortgage arrearage, the remaining balance due on your vehicle as well as past due tax debt and all other debts in your Chapter 13 plan. In a best case, Chapter 13 will both reduce your total indebtedness and it will reduce your monthly out of pocket costs. In other cases, Chapter 13 won’t do much to change your total debt or monthly budget but it will stop a pending foreclosure or repossession.
Chapter 13 is only available to human beings – corporations or LLC’s cannot file Chapter 13. They must file Chapter 11. Also, in a very few situations, Chapter 13 will not be an appropriate solution for an individual because the individual owes too much debt (you can only file Chapter 13 if your total unsecured debt is $360,475 or less and if your total secured debt is $1,081,400 or less. In these situations, Chapter 11 is an available option
About Chapter 11
Chapter 11 bankruptcy functions as a debt reorganization procedure for large and small businesses and individuals who owe more than the Chapter 13 debt limits. Like Chapter 13, a Chapter 11 debtor and his attorney will submit a payment plan to the Bankruptcy Court that sets out how various classes of creditors will be paid.
Unlike Chapter 13, a Chapter 11 business bankruptcy debtor will usually negotiate more with creditors (creditors committees) than with a trustee. Chapter 11 is much more paper intensive, complicated and expensive than Chapter 13.