Why different chapters?
The bankruptcy code contains various sections and provisions which delineate the different chapters of bankruptcy. “Chapter” merely refers to the kind of bankruptcy and the specific rules that apply. Why are there different chapters? The simple answer is because there are many different circumstances of individuals who file for bankruptcy. Some debtors are unemployed or unable to work due to disability. Some debtors have minimal assets and debts. Other debtors have millions in debt and/or assets. Other debtors may have steady income, but they are simply overwhelmed dealing with paying creditors on the creditor’s terms.
Debtors who look for bankruptcy protection of any chapter usually have one thing in common: they are struggling to pay their bills as they come due, and are seeking relief or assistance with their debt problems. This is the underlying purpose of the Bankruptcy Code- to assist the overwhelmed individual who is buried by their creditors and need to hit the “reset” button and get a fresh start.
Chapter 7 – Liquidation
Chapter 7 bankruptcy is a liquidation, or “wipe-out”, bankruptcy. This chapter allows a debtor to discharge all of their dischargeable debt in one fell swoop. Some debts that are not dischargeable in Chapter 7 include most taxes, alimony, child support, court fines, student loans, and debts owed to government.
Chapter 7 debtors are not required to make payments back to their creditors. In exchange for receiving a discharge, debtors under Chapter 7 are required to turn over any non-exempt or unprotected assets to a court appointed trustee for liquidation. The court trustee then uses funds received from liquidating these assets to pay the debtor’s creditors. If a debtor does not have any non-exempt assets, then the case will be simply closed as a “no-asset” case, and there will be no distribution to creditors. The majority of chapter 7 bankruptcies filed in Nevada are no-asset cases.
In order to file for Chapter 7 bankruptcy, a debtor must qualify to file. Debtors must pass an income-based “means test” in order to be eligible to file under Chapter 7. If a debtor does not pass this means test, then they will likely be forced to file for Chapter 13. The details of the means test are quite complex, and seeking advice from a competent lawyer is recommended to make sure you are eligible for Chapter 7.
Chapter 13 – Repayment Plan
Chapter 13 bankruptcy allows a debtor to repay their creditors on a structured, court-approved repayment plan. In some cases, the repayment plan may pay as little as 1% to the debtor’s unsecured creditors. In other cases, the play may pay 100% of the debt back. How the plan is structured depends on the debtors own circumstances. There are many factors that have to be taken into consideration when building a chapter 13 plan such as: the debtors monthly income; the size of the debtors household; the debtors budget; the nature and amount of the debts; whether there the debtor was delinquent in their secured debt payments prior to the bankruptcy; whether there are priority debts to deal with; as well as many others.
A Chapter 13 debtor is required to commit all of their “disposable monthly income” as determined by the Chapter 13 means test. This allows a debtor enough money to be able to pay for all of their normal bills, and then pay what they can afford to creditors. Chapter 13 bankruptcy brings all the debts into one forum to be dealt with in one monthly payment.
There are several advantages to chapter 13 over other chapters of bankruptcy. First, chapter 13 debtors who are upside down on their house may be able to remove a second mortgage, and only continue paying their first mortgage. Second, a chapter 13 debtor can “cram down” or reduce a rental property to market value. In addition, chapter 13 can help debtors stop interest and late penalties from accruing on their high interest credit cards. Chapter 13 can help simplify a debtors budget by only having to pay one bill aside from their normal monthly bills for rent, utilities, food, etc.
Feel free to come talk to one of our qualified attorneys about whether a Chapter 7 or Chapter 13 bankruptcy may be just what you need to steer your finances back on to the right track.
By: Caleb Zobrist, Esq.