Once you determine that bankruptcy is a smart, financial tool to eliminate your debt and and reorganize your finances, you need to determine what Chapter to file. There are six Chapters of relief to chose from. These Chapters are found in Title 11 of the United States Code. By the way, the reason why they are called Chapters is because they are literally the chapters in the bankruptcy code.
Chapter 1: It was the best of times, it was the worst of times…
The typical consumer debtor will files a Chapter 7. A Chapter 7 is also known as a straight bankruptcy. It takes about four months from beginning to end. While most may want to file a 7, you have to be eligible. The debtor must be under the median household income level for their family size. If the income is over the median, a means test must be “passed” in order to rebut the presumption of abuse. However, you will need sufficient exemptions to protect all your property. If not, the property will be turned over to the bankruptcy trustee for sale with the proceeds going to the creditors. Since the Federal exemptions are fairly generous, most filers keep all their stuff but it’s still a consideration to keep in mind.
But I want to file a Chapter 7, not a Chapter 13.
Chapter 13 is for wage earners with a regular source of income that are able to pay something back to their creditors. The person that files Chapter 13 either makes too much money a Chapter 7 or has to file a Chapter 13 to force a creditor to take payments over an extended period, e.g., to save a house from foreclosure. The payment plan is typically three to five years.
So tell me again why I should file a 13.
While debtors usually want to file a Chapter 7 there are some benefits to filing a Chapter 13 that are not available in a Chapter 7. In a 13, you can strip your second mortgage or home equity line. You could tax care of back taxes or catch up on support arrears. Chapter 13s can discharge divorce property settlements and judgments. Also, since you are paying back something to your creditors, non-exempt property that would otherwise be lost in a 7 can be kept. That’s not too shabby.
Chapter 7s and 13s account for a great majority of all filings but, just if you really want to know the other four, read on. Chapter 9 is for municipalities or cities. Chapter 11 is for businesses or individuals with high assets or income. Chapter 12 is for family farmers and fisherman. Chapter 15 is for international bankruptcies or foreign debtors. These are very specialized areas and your typical bankruptcy attorney doesn’t handle these.
“B” also stands for:
- competence and compassion
- credit counseling
Christopher McAvoy is a Taylor, Michigan attorney and consumer bankruptcy lawyer who helps people in the Downriver area file Chapter 7 and Chapter 13 Bankruptcy. To find out more about bankruptcy, read The Bankruptcy Book.