“C” Is For Chapter Of Relief

"C" is for chaptersOnce 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:

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.

Creative Commons License photo credit: loop_oh

Filing Bankruptcy and Keeping Your House.

Detroit, Michigan houseMost of my clients who file for bankruptcy in Michigan want to know if they can keep their house or home if they file under Chapter 7. Debtors are allowed to keep all exempt property. Exemptions are used to protect your assets. An asset is anything with value so the first determination is the value of the house and real estate. Some debtors are going to lose their house just because they can’t afford it.

In the current real estate market, real property is taking a beating. If your house is worth less than what you owe, then it isn’t really an asset. If you sold it, what would you get? A Chapter 7 Trustee is only interested in assets. An underwater house isn’t an asset. It’s usually your biggest debt. If this the case, you can keep it your underwater house. Lucky you.

If the house has some equity, you will have to use your your homestead exemption to protect that equity. You can protect up to $20,200 in equity using the federal exemption 11 USC 522(d)(1). If you are married and it is jointly held, you can double this exemption. That’s a lot of equity you can protect. Most of my clients in the Detroit, Michigan area and the surrounding cities like those in Taylor and the Downriver area don’t even come close to that kind of equity.

If the house has more equity than your exemption allows, there is a really good chance the Chapter 7 Trustee will be looking in to selling or liquidating the house. You would still get to keep your exempt amount. For example, if a house is worth $100,000 and it has a secured mortgage with a balance of $50,000, you would have $50,000 in equity. If you were married, you could protect $40,400 which would leave $9,600 unprotected. The Trustee is going to want that and if that means the house has to be sold to get it, so be it.

If your situation is like that in the example, you may want to consider filing a Chapter 13 or be prepared to “buy” your non-exempt amount from the Trustee. The Trustee really doesn’t care where the money comes from as long as it is paid and can be paid to the unsecured creditors.

You can read more about exemptions, property, Chapter 7 and Chapter 13 in Michigan in my free e-book, The Bankruptcy Book.