The debtor must complete a credit counseling course before filing for bankruptcy. Courses can be found online. Debtors have to also take another course before the discharge. The two courses cannot be taken at the same time. Chapter 7 and Chapter 13 are the two common consumer bankruptcies.
Chapter 7Most consumers, whether they own a business or not, file either Chapter 7 and Chapter 13. The debtors assets become the property of a bankruptcy estate upon filing. An automatic stay temporarily prevents creditors from collecting any debts when bankruptcy is filed. A trustee is appointed by the court to supervise the estate. Chapter 7 is a liquidation bankruptcy in which all the assets of the estate are distributed to the creditors. Depending on the amount of property that the debtor may keep based on the exemptions, the creditor may get pennies on the dollar or nothing at all. Exemptions are typically limited to certain dollar amount so that any value above that would have to be liquidated for the creditor, usually by sale. However, BE VERY CAREFUL when listing the value of your assets. The court is not looking for replacement value, nor is it looking for what a dealer would get, but what you would get if you had to sell. How much would it be worth at the flea market or at a garage sale? Hence, a piece of furniture bought for $2,000, after a year or two might worth $200. This is fair because the trustee also would not get more if he or she sold the property at a liquidation sale.
We must distinguish between secured debt and unsecured debt. Secured debt when there is a lien or collateral. A mortgage on a home is a secured debt and the home is a security that the creditor can take if the debt is not paid. Technically, secured debts have to be repaid if the debtor want to keep the security. However, if the security is worth less than the debt, a debtor might be able to do a "cram-down" to discharge the difference between the value of the security and the amount owed.
Filing bankruptcy is a lot of work. You will need to collect and copy pay stubs, bank statements, credit card statements, and a host of other financial information. You will have to take inventory of everything you own including clothing, books and furniture. You will have to determine the "garage sale" value of all your possessions
The "Means" Test
Chapter 7 can be attractive to many debtors because it provides a discharge of debts in a short amount of time. However, not every debt is eligible to file for Chapter 7. The Bankruptcy Code assumed that anyone that makes below a certain income cannot be abusing the system. In other words, their "means" qualifies them. Income is not current income but the income over the last six months. Keep this in mind when trying to time when to file. Basically, if a debtor makes less than the median income in the area, he or she passes the means test. However, there are permissible expenses, with limits, for food, shelter, clothing, and other needs that can push a debtor below the median income.
The debtor must complete a credit counseling course before filing for bankruptcy. Courses can be found online. Debtors have to also take another course before the discharge or cancelling of the debts. The two courses cannot be taken at the same time.
Chaprter 13Chapter 13 is a repayment bankruptcy in which the debtor is allowed to keep most of his or her assets in return for a repayment plan taking up to five years to pay off creditors in part or in full. Chapter 13 bankruptcy does not necessarily provide that the creditor will get fully repaid during this time period. This will depend upon the debtor's income and living expenses. In no case would a plan allow the debtor to pay the creditors less than they would have been paid under Chapter 7. The advantage of Chapter 13 is that a plan is set up to allow the debtor to keep his or her assets.
The debts under a Chapter 7 are discharged fairly quickly. It is just a matter of liquidating the asset, if any after the exemptions. Most of the time there are no assets. By contrast, the debtor has to pay creditors for three to five years under Chapter 13 before the discharge. The assets of the debtor remain in the estate under the trustee for three to five year. The debtor can still use the family car, keep the furniture, but technically all his or her assets belong to the estate until the case is closed after three to five years.
Like filing under Chapter 7, filing under Chapter 13 is a lot of work. You will need to collect and copy pay stubs, bank statements, take inventory of everything you own including clothing, books and furniture. You will have to supply credit card statements, credit reports and a host of other financial information.
Debtors also have to go through the means test under a Chapter 13 bankruptcy that will determine if the discharge will be in three or five years. Until the discharge, the debtor must pay the creditors all income above his or her living expense. The debt comes up with a plan, a payment plan. But careful, it is not so advantageous to have such a low income that nothing is left to pay after living expenses because the plan will likely be rejected. The goal of the Chapter 13 is give the debtor some breathing room to make a good faith effort to pay off the creditor as much as possible.