Bankruptcy allows a person or business to deal with their debt. There are two main types of bankruptcies for consumers: Chapter 7 (known as a liquidation) and Chapter 13 (known as a reorganization). In addition there are other chapters for corporations, farms, and municipalities but those will not be covered in this blog.
Chapter 7 – This is known as a liquidation. It allows you to discharge (wipe out) your debt. Debt is classified in three categories: Secured Debt, Unsecured Debt and Priority Debt — all of which will be covered below.
Chapter 13 — This is known as a reorganization and allows you to restructure debt payments to make them more affordable. The most common reason people file Chapter 13 bankruptcies is to protect their home, vehicles or stop garnishments.
Secured Debt: This is debt that is backed by collateral (examples: house, vehicle)
Unsecured Debt: This is debt that is not backed by collateral (examples: credit cards, medical debt, personal loans).
Priority Debt: This is usually debt owed to governmental agencies (taxes, child support)
What Bankruptcy Should I Choose?
If most of your debt is unsecured debt, then you likely want to do a Chapter 7. If you are current on your secured debt and your only issue is that you have $30,000 in credit card debt and personal loans. Then the best choice for you is to file a chapter 7. The Chapter 7 process takes about 90 to 100 days and at the end of that, you receive a discharge of all of your unsecured debt. Discharge is another way of saying the debt gets wiped out.
Even if you are not current on your secured debt, a Chapter 7 still may be your best choice. For example, if you have a vehicle that you no longer want to keep that is secured by a loan (secured debt), you can file a chapter 7 and surrender the vehicle to the creditor. At the end of your Chapter 7, the debt will be discharged and the creditor will take back the car. The creditor will not be able to sue you or come after you for any money damages.
Remember, you still have to qualify for a chapter 7. The Court requires you to file a means test, which takes your last 6 months of income and expenses and compares that to the median income in your county. If you are below median you would pass the means test. Even if you are above-median, you can still qualify for a chapter 7 based on your expenses and deductions.
If most of your debt is secured debt and you are behind on it and want to keep the property, then a Chapter 13 is likely your best option. A chapter 13 allows you to restructure secured debts. Most of my clients who file Chapter 13’s are trying to save vehicles and/or their home. Chapter 13 allows them to do that. In a Chapter 13, you file a plan with the court that lays out how you are going to pay your creditors. The typical Chapter 13 lasts 3 to 5 years. At the end of the case you will receive a discharge (like the Chapter 7). You can also discharge your unsecured debt in a Chapter 13.
If most of your debt is priority debt (IRS, Child Support), then a Chapter 13 may be the best choice. In Chapter 13 you can repay your priority debt over 3 to 5 years. In most situations, paying the debt back in a Chapter 13 is much cheaper than trying to pay it back directly to the Creditor.
This is also something you have to consider before deciding what Bankruptcy to file. If you have a lot of non-exempt assets, then you DO NOT WANT to file a Chapter 7. Let me give you an example.
Let’s say you have a large tax refund coming to you in the amount of $15,000. In some instances you could exempt this but for this example let’s assume you cannot exempt it. If you filed a Chapter 7, you would have to turnover the $15,000 immediately. The Chapter 7 Trustee would then use that money to pay your creditors.
In a Chapter 13, you would not be forced to turnover the non-exempt assets, instead, you would be able to pay the value of the non-exempt assets to your creditors over a 3 to 5 year period. In the above example, you would keep the $15,000 and would pay $250 per month for 5 years.
There are all sorts of reasons to choose one chapter over another. The good news is, almost every single law firm provides a free consultation. At Herrin Law, we always go over all the options during the first call and make a recommendation for the type of bankruptcy you should file.
If you want to discuss your financial situation in more detail you can call 469-607-8552 and set up your free financial strategy session (30 minutes). Also, if you decide to hire my law firm and mention this blog, you will receive a 10% discount on your fees.