What Is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy—also called "straight" or "liquidation" bankruptcy—is designed to give you a fresh start by wiping out many types of debt. In return, the bankruptcy trustee sells (liquidates) your nonexempt property to provide partial repayment to creditors. Many people have very little non-exempt property, so most Chapter 7 bankruptcy filers end up keeping most or all of their property.
Who Is the Debtor in Chapter 7 Bankruptcy?
A debtor is someone who owes money for an outstanding debt. "Debtor" is also the term used to describe someone who files for bankruptcy relief. A debtor can be an individual or company. By contrast, the "creditor" is the person or business to which the debtor owes money, and a "codebtor" is responsible for a debt along with you. For instance, if your aunt cosigned your loan (signed a contract agreeing to pay for the car if you didn't), your aunt would be the codebtor on the loan. As codebtors, you'd both be responsible for paying off the obligation. Learn more about a consigner's responsibilities in Will Your Cosigner Be Liable for Debt if You File for Bankruptcy?
I’ve Heard I’ll Have to Qualify for Chapter 7 Bankruptcy. Is This True?
In Chapter 7, the debtor's household income must be low enough to qualify. Suppose the household income is below the state median income for similar households. In that case, the debtor presumptively qualifies for Chapter 7, although the judge can still require filing under Chapter 13 if the debtor has sufficient income to fund a Chapter 13 plan. If the debtor's income is higher than the median, the rules then look at the debtor's means. If, after considering certain expenses and debt payments, enough income exists to fund a repayment plan, the debtor will qualify. For more details, read The Bankruptcy Means Test: Are You Eligible for Chapter 7 Bankruptcy?.
Will All of My Unsecured Debts Be Wiped Out in Chapter 7 Bankruptcy?
Chapter 7 bankruptcy wipes out most types of unsecured debt. Unsecured debts are debts that aren't guaranteed by collateral property. (A mortgage is a secured debt guaranteed by the home; an auto loan is a secured debt guaranteed by a vehicle.) Unsecured debts wiped out by Chapter 7 bankruptcy include credit card debt, medical bills, and gasoline card debt.
However, you can't wipe out all unsecured debt. For instance, child and spousal support and student loans (except in limited circumstances) are nondischargeable—you'll remain responsible for repaying them after bankruptcy. Some other debts might not be dischargeable if the creditor objects, such as recent debts for luxury goods, debts incurred based on fraud (such as lying on a credit application or writing a bad check), and tax debts first due within the previous three years. Learn more about which obligations remain after Chapter 7 bankruptcy in What Bankruptcy Can and Cannot Do and When Chapter 7 Bankruptcy Isn't the Right Choice.
If I’m Current on My Mortgage, Can I Keep My Home in A Chapter 7 Bankruptcy?
You will be able to keep your home in Chapter 7 bankruptcy if all of your equity in the house is exempt. What is exempt equity? Although the Chapter 7 bankruptcy trustee can sell some property to pay unsecured debtors, you can keep a certain amount of property, called "exempt property."
Bankruptcy law in all but a handful of states allows homeowners to keep some home equity using a "homestead exemption." The exemption amount varies by state. If all of the equity is exempt, the Chapter 7 bankruptcy trustee can't sell your home as part of the bankruptcy. As long as you keep current on your mortgage, the house remains yours. Learn more in Your Home in Chapter 7 Bankruptcy.
I Don’t Own a Home, but Will I Have to Give Up Other Property if I File for Chapter 7 Bankruptcy?
The bankruptcy trustee can sell some of a Chapter 7 debtor's property to repay unsecured creditors, but protections exist. All states allow debtors to keep a certain amount of property known as "exempt" property. Most states exempt property up to a specific value in vehicles, clothing, household furnishings, appliances, pensions, tools necessary in a trade or profession, home equity, and public benefits. The extensive list of exemptions allows many debtors to keep all or most of their property. Learn more in When Chapter 7 Bankruptcy Isn't the Right Choice.
How Does a Chapter 13 Bankruptcy Case Work?
Chapter 13 of the federal Bankruptcy Code allows a consumer to repay all or a majority of his or her debts through a payment plan approved by the Bankruptcy Court. When the plan is in place, creditors generally are prohibited from collecting debts directly from the debtor. Instead of paying his or her creditors directly, the debtor pays a certain amount every month to the Chapter 13 trustee, and the trustee distributes the money to the creditors, as provided in the Chapter 13 plan. When the last payment is made, the debtor receives a discharge for the remainder of his or her dischargeable debts.
How Long Does It Take To Complete a Chapter 13 Plan?
For those who earn less than the median income for the state they live in, a Chapter 13 plan can be completed in as little as three years (36 months). If the debtor’s monthly income is higher than the median income in their state of residence, the plan will generally last for five years (60 months). By law, a Chapter 13 repayment plan cannot last longer than five years.
How Does Chapter 13 Differ From Chapter 7 From the Point of View of the Debtor?
The essential difference between Chapter 7 and Chapter 13 is in the handling of the debtor’s property. In a Chapter 7 case, all non-exempt property owned by the debtor is sold, and the proceeds are used to pay as many of the debtor’s debts as possible. In a Chapter 13 case, a debtor’s income is applied towards payment of as many of the debtor’s debts as possible, with little or no impact on the debtor’s property. In addition, the discharge issued in a Chapter 13 case is usually broader than a Chapter 7 discharge and will relieve the debtor of liability for several types of debts that are not discharged by a Chapter 7 case.
Why Would a Debtor Choose Chapter 13 Over Chapter 7?
Chapter 13 is the preferred choice for a person who wishes to repay most or all of his or her unsecured debts, and whose income is sufficient to allow him or her to do so in a reasonable amount of time. In addition, if the debtor has a considerable amount of nonexempt property or a lot of valuable exempt property used as security for debts, this property could be lost in a Chapter 7 case, so Chapter 13 may be the preferred option. Some other types of debtors, whose debts might not be discharged under Chapter 7 and those with one or more large debts that may be discharged only under Chapter 13, might opt for Chapter 13 over Chapter 7.
What Debts Are Paid by a Chapter 13 Plan?
The plan may pay any and all debts of the debtor, including secured and unsecured debts, and even debts that are non-dischargeable, such as student loans and spousal and child support.
How Much Must the Debtor Pay to the Trustee?
The law says that all of a debtor’s “disposable income” received during the time of the plan must be paid to the trustee. The law defines “disposable income” as all income earned or received by the debtor that is not reasonably necessary for the support of the debtor and the debtor’s dependents.
Who Is the Trustee?
The trustee in a Chapter 13 case is someone who is appointed by the Bankruptcy Court to receive the regular payments from the debtor, distribute those payments to the creditors according to the Chapter 13 plan, and administer the bankruptcy case until it is closed. The debtor is always required to cooperate with the Chapter 13 trustee.
May a Self-Employed Person File Under Chapter 13?
Yes. A self-employed person meeting the eligibility requirements may file under Chapter 13 and may continue to operate her or his business during the resolution of the bankruptcy case and the completion of the plan.
Should a Married Couple File a Joint Chapter 13 Petition?
If both the husband and wife owe a significant amount of money, they may wish to file jointly under Chapter 13, even if only one of them has income. Otherwise, the non-filing spouse could still be liable for the unpaid debts.
May a Debtor Convert a Chapter 7 Case to a Chapter 13 Case?
Yes. A Chapter 7 case may be converted to a Chapter 13 case at the request of the debtor at any time before the case is closed, unless the case was converted previously from Chapter 13 to Chapter 7.