CHAPTER 7
BANKRUPTCY
- Chapter
7 Bankruptcy is commonly known as a liquidating bankruptcy. The
concept of Chapter 7 Bankruptcy is that all of a Debtor's
non-exempt property
becomes property of the bankruptcy estate and is liquidated by the
bankruptcy trustee. The sale proceeds are then distributed among the
Debtor's creditors.
However, in the majority of
consumer Chapter 7 bankruptcy cases, most assets owned by the Debtor
are exempt from
execution under applicable State and Federal laws. Therefore,
in most cases, a
Debtor can file Chapter 7 and retain possession and ownership of his
or her property. In Chapter 7, the Debtor receives a discharge which
eliminates credit card debt, medical bills, and other similar debt,
plus debts secured by vehicles, real or personal property or other
assets surrendered to the Debtor's secured creditors.
A Debtor may have the option
of retaining possession of assets (such as a car or a home) securing
a Creditor's claim, provided the Debtor agrees to continue paying
the debt secured by the asset the Debtor desires to keep.
CHAPTER 13 BANKRUPTCY - Under
Chapter 13, the Debtor retains all of his or her assets, and the
Debtor formulates a plan under which the Debtor proposes to re-pay
Creditors all or a portion of the debt owed to them over a period of
three to five years. The Debtor must make a single monthly plan
payment to the bankruptcy trustee throughout the duration of the
plan, and the bankruptcy trustee distributes the plan payment among
all of the Debtor's Creditors in amounts and priorities specified in
the plan. (Certain obligations including long-term secured
liabilities may be paid outside of the plan.) The amount of the plan
payment is an amount equal to all of the surplus income of the
Debtor and the Debtor's spouse. Surplus income is all income
received by the Debtor and his or her spouse that is not reasonably
necessary for the support of the Debtor and the Debtor's dependents.
Many interesting and valuable
options are available to Debtors in Chapter 13 cases that are not
optional in Chapter 7 cases. For example, arrears owed to a secured
creditor can be cured within the Chapter 13 Plan. This is
particularly valuable to Debtors behind on their home mortgages. In
addition, secured claims need only be fully paid to the extent of
the value of the property securing the claim. Home mortgages have
special rules in this regard under recent amendments.