Overview of Chapter 7 Bankruptcy

Otherwise known as “liquidation”, a debtor in a Chapter 7 discloses all of his/her assets, and claims exemptions for each asset as provided by either the State or Federal schedule of exemptions. There are specific exemptions for a variety of assets, and the trustee cannot take control over and sell exempt assets. There is also a “wildcard” exemption under Federal law that can be “stacked” on top of other exemptions should it be insufficient to fully cover the value of the asset. After examination by the trustee (and possibly creditors), a trustee issues one of two reports: a Report of No Distribution, meaning that there is nothing to take from the estate and sell for the benefit of creditors, or a Notice of Assets notifying creditors that at least one unexempt asset has been discovered which may be sold to satisfy creditors. A good bankruptcy lawyer must carefully examine the financials of each client, examine prior transfers of assets, if any, and anticipate the obstacles that may arise from the filing of the petition, and more importantly, be capable of resolving such obstacles with the Trustee and creditors should they arise. A good bankruptcy lawyer is also a good trial lawyer, who is able to defend lawsuits within the bankruptcy proceeding, known as “Adversary Proceedings” by successfully representing clients at each stage of litigation. Most importantly, a good bankruptcy lawyer makes sure the client makes fully informed decisions. Once the trustee determines that there is no asset to sell, or resolves the issue of any unexempt assets with the debtor’s attorney, all unsecured debts, such as medical bills, credit card debts, personal loans and lines of credit, and personal guarantees on business debt are fully discharged forever. The entire process generally takes about 4-6 months.

Chapter 7 is ideal for those with little to no assets, earning moderate income, and facing debts that are mostly unsecured. A typical Chapter 7 client faces the following financial difficulty: They are working and are earning a moderate wage, but not enough to pay off credit card or medical debts on top of paying their car and house payments. Without debt discharge, they would be in debt forever. If they were able to discharge their unsecured debts, they can apply the payments they would have paid on those debts towards secured debts, and eventually be entirely debt free. Another typical Chapter 7 client are those with failing small businesses, traditionally in the service industry, for example dry cleaners and nail salons. They have often taken out business loans they have personally guaranteed in order to purchase the business or make needed renovations, or are several months behind on their business lease, which was also personally guaranteed. While they may want to close the business, they are worried that the debts will follow them due to the personal guarantees.

Overview of Chapter 13 Bankruptcy.

Chapter 13 may provide a debtor with debt relief even if they make too much money to qualify for a Chapter 7 case or even if they have assets are cannot be exempt in the Chapter 7 case. It allows a debtor to come up with a Plan, over 3 or 5 years, to pay back deficiencies in secured debts such as a mortgage or car loan, which keeping the home and car, and using disposable income (after all living expenses are paid) towards repayment of unsecured (credit cards, medical bills, personal loans) and priority unsecured debts (certain taxes, for example). After the Plan period is over, any remaining debts are discharged and the debtor may resume payments on the secured debts. In certain cases, portions of junior liens, such as second mortgages, may be discharged even though they are secured debts by way of a process called “lien stripping”. Recorded judgments, which serve as a state-wide lien on all property, including the home, can often be avoided in full subject to certain guidelines.
An important difference between a Chapter 13 and a Chapter 7 is that in a Chapter 13, the debtor remains in possession of all of his/her assets, and therefore in most cases has an absolute right to withdraw or terminate their bankruptcy case. This is very powerful because it provides the debtor the temporary relief by way of an Automatic Stay (which stops all collections efforts, lawsuits, harassing telephone calls, etc), while they formulate a Plan to get out of debt. A Chapter 13 debtor may convert the case to the Chapter 7 case later if it is deemed appropriate, or choose to cancel the bankruptcy and elect a different course of action.
Not everyone is eligible for a Chapter 13, and not everyone who is eligible for a Chapter 13 is an ideal candidate. A good bankruptcy lawyer will accurate assess their client’s financial condition, estimate the monthly plan payments required, strip or avoid liens and judgments to the extent possible, and work out a Plan that best fits the client’s needs.

Chapter 13 is ideal for a debtor who owns a home with equity above any beyond that which may be exempted under Chapter 7, but has fallen behind on their mortgage payments. His/her household earns sufficient income to make ongoing payments on the secured liens on top of paying for basic living expenses if only the debt balance can be modified in such a way that they can make installment payments over the course of 3 or 5 years. They also benefit from not having to make any payments, or minimal payments against their unsecured debts such as medical bills or credit cards.