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Chapter 7 is the simplest, most straightforward form of bankruptcy. The concept of bankruptcy has been with us since biblical times, when a debtor could turn over all of his belongings to his creditors and be forgiven of the remaining debt. Contemporary lawmaking is kinder to debtors, permitting families to keep certain property so that they can continue to function in society. Chapter 7 can be filed by individuals, couples or businesses. It causes unsecured debt to be discharged (wiped out) but leaves secured and priority debts largely in place. Examples of unsecured debt include credit cards and signature loans. If the debt had collateral against it, in other words, if the creditor had the right to reposses specific property if the debt were not paid, then the debt would be secured. Examples of secured debt include in-store purchases of goods like major appliances, furniture, jewelry and consumer electronics, where the financing is arranged by the store; auto loans and home loans. Priority debts are usually those that cannot be discharged through bankruptcy, like child support obligations, criminal penalties and some taxes. Even though persons filing bankruptcy are required to list all of their creditors in the petition, there is no guarantee that all of their debts will be wiped out. In Chapter 7 only the unsecured, non-priority debts are discharged.
Chapter 13 is much more flexible than Chapter 7. It is a reorganization of debts, rather than a liquidation of certain debts, as in Chapter 7. Chapter 13 is available to individuals and couple who have regular income. Unlike Chapter 7, which only looks at the assets that debtor have at the time their bankruptcy case is filed, Chapter 13 also takes into consideration the future earnings (for 3 to 5 years) of the debtor(s) and gives them the opportunity to restructure their debts using these earnings. Why would anyone who is filing bankruptcy want to use their future earnings to pay their creditors? For a number of reasons. Many bankruptcy trustees will flag Chapter 7 cases where the debtor(s) earn enough money to reorganize their debts and insist that these cases be converted to Chapter 13 under threat of dismissal. Besides, many debtors feel bad about filing bankruptcy and prefer to voluntarily repay at least a portion of their debts. Some of these people were counseled by Consumer Credit Counselors, a non profit debt counseling service that is funded by the credit industry. They may have learned that their debts are too great for them to afford a CCC budget, but that they can afford a Chapter 13 reorganization. Like Chapter 7, Chapter 13 breaks debts into three classes: Secured, priority and unsecured. In Chapter 13, secured and priority debts are paid back at 100 cents on the dollar over a period of 3 to 5 years. That comes in handy when the IRS is about to levy against someone's bank account, or someone's mortgage lender wants all the missed payments by 2:00 p.m. today. Chapter 13 spreads out the back taxes and missed home loan payments for 36 to 60 months, thereby allowing people to keep their bank accounts and homes. Under Chapter 13, even the unsecured creditors can expect something (unlike in Chapter 7). Depending upon the debtor(s) income and expense budget, the unsecured creditors may be paid as little as zero cents, to as much as 100 cents, on the dollar. Some courts require a minimum percentage, such as 10% in San Francisco and San Jose, California; or 70% in Oakland, California before they will confirm a Chapter 13 Plan of Reorganization. Chapter 13 also allows people to reorganize auto loans and, in some cases, get a reduction in the amount they ultimately have to repay to keep a car that they may have paid too much money for. It is a more expensive and complex form of bankruptcy than Chapter 7, but Chapter 13 can pay big dividends that outweigh the disadvantages if used properly in the right circumstances.
Even though individuals can file Chapter 11, it is, for all practical purposes, the bankruptcy chapter for big corporations. There are some forms of small business, or simplified, Chapter 11 in various courts. And Congress periodically addresses the need for a bankruptcy chapter to fill the gap between a business Chapter 13 cases and the big Chapter 11 cases. But for the time being, a broad gap exists between the two. Chapter 11, by its nature, requires a lot of work (attorney time) to file and maintain the case, so attorneys fees and costs quickly mount into the thousands of dollars. This overhead makes Chapter 11 cases so expensive that they should be reserved for medium to large corporations and other well healed debtors.
The debtors have to make one court appearance in consumer Chapter 7 and 13 cases. It is known as the "341 Meeting" or "Meeting of Creditors." It is usually held in a meeting room, or in a courtroom when court is not in session, and is presided over by the Trustee (who wears a business suit instead of that intimidating black robe worn only by judges). Most of your time at the Meeting will be spent listening to instructions given by the Trustee and waiting for your case to be called. Once you are called, you will be asked to state your name and verify your address. The Trustee may ask you to explain or clarify information that you gave in your petition, so it is helpful if you bring a copy with you to refer to. You may additionally have the opportunity to meet with some of your creditors to discuss whether you'd like to keep property that is financed, or voluntarily keep making payments on store accounts or credit cards to keep those accounts and rebuild your credit.
Every state has its own set of laws that list how much property a debtor can keep safe from his or her creditors. Such exempt property is generally sufficient for debtors to continue to live, work and recover from their financial difficulties. Debtors may generally keep their home, home furnishings, wardrobe, auto, tools of the trade and/or office or industrial equipment; retirement savings, whole life insurance and personal items like jewelry and sporting goods. The exact makeup and extent of the exemptions depends upon the state where the bankruptcy is filed. For most people, the exemptions are sufficient to allow them to file bankruptcy without having to give up assets that they own.
It's never a bad idea to be represented by an attorney. And bankruptcy attorneys are probably the most affordable lawyers available. Some will argue, though, that they simply cannot afford any attorney when they're on the verge of bankruptcy. So many people successfully rely on self help books and forms kits to guide them through their bankruptcy case. If you have to represent yourself, there are a few things that you can do to increase your likelihood of having a non-eventful case. First, carefully read a do it yourself bankruptcy guide. Shop here for titles available for Chapters 7 and 13 that include tear-out forms. You can also search for help from a bankruptcy lawyer using the seach box at the top of this page.