The Basics of Chapter 7 and Chapter 13

Chapter 7 Bankruptcy:

There are two main chapters in which individuals file for bankruptcy:  Chapter 7 and Chapter 13.

First, let’s briefly discuss Chapter 7 bankruptcy.

Chapter 7 bankruptcy is known as the “fresh start” or “straight” bankruptcy.  When you think of bankruptcy, this is probably what you are thinking of.  It is the most popular bankruptcy, and generally it is quick and relatively easy to navigate.

When the bankruptcy petition is filed with the court, something called the “automatic stay” goes into effect.  The automatic stay is like a door slamming shut on your creditors.  Once it is in place, your creditors cannot attempt to collect a debt in any way.  That means no more harassing phone calls and no more nasty collection letters.  If you have been sued by a creditor, the automatic stay will stop the lawsuit.  Not only that, but if you have a judgment against you, and the creditor is trying to enforce the judgment (either on your property or bank account), the automatic stay will stop the creditor from enforcing that judgment.

Most people who file for Chapter 7 are able to keep all of their possessions, including their car, their home, and their retirement accounts (such as a 401(k) or IRA).  Bankruptcy law allows you to keep certain property, and a good bankruptcy lawyer will guide you and apply the law to your specific circumstances.  That way you can maximize the amount of property you can keep and still greatly benefit from the bankruptcy.

Most Chapter 7 bankruptcies have only one hearing.  The hearing takes place some thirty to forty-five days into the case.  This hearing isn’t even in a courtroom and it is not in front of a judge.  A bankruptcy trustee conducts the hearing and it shouldn’t even last very long.  If you have an attorney, he or she will accompany you and sit beside you during the hearing.

There are some qualifications to determine if you qualify for Chapter 7.  A good bankruptcy lawyer will know these qualifications and determine if you qualify.  You should consider Chapter 7 if you are too deep in debt and there is no way you can pay off your debts, or even keep up with the minimum payments.

Chapter 7 isn’t for everyone – for instance Chapter 7 may not be appropriate if you are behind on your mortgage and want to save your house, or if you have certain debts that cannot be discharged in bankruptcy, such as certain taxes and student loans.

Chapter 13 Bankruptcy:

Chapter 13 bankruptcy is quite a bit different than Chapter 7 bankruptcy.  Chapter 7 is relatively quick and straightforward to navigate.  On the other hand, Chapter 13 can last anywhere from three to five years.

Although Chapter 13 is different than Chapter 7, it still has the general benefits of bankruptcy.  Like any other bankruptcy, when the bankruptcy petition is filed with the court, the aforementioned “automatic stay” goes into effect.  The automatic stay is like a door slamming shut on your creditors.  Once it is in place, your creditors cannot attempt to collect a debt in any way.

The most important difference between Chapter 7 and Chapter 13 is that in Chapter 13, you will be repaying some of your debts in a Chapter 13 Plan.  A common example is when a Chapter 13 debtor is facing foreclosure on her home.  In this case, Chapter 13 can be a useful tool to catch up on the mortgage arrears and save the home.

There are other reasons to file Chapter 13.  For instance, Chapter 13 is a useful tool to pay off tax debts, whether it be the IRS, the PA Department of Revenue, or any local taxing authority.

In short, Chapter 13 is best described as a household reorganization.  The chapter 13 debtor is paying money to his or her creditors on a monthly basis.  There is a “Plan” of reorganization that must be confirmed by the Chapter 13 Trustee.  That Plan can last anywhere from three to five years.  The amount paid back in the Plan depends upon the nature of the debt, how much debt there is, and the income of the debtors who filed the Chapter 13.  A good bankruptcy lawyer, well versed in the intricacies of Chapter 13, can guide you and educate you in this process.

Much like Chapter 7, you should only have to attend one hearing.  The hearing takes place some thirty to forty-five days into the case.  This hearing isn’t even in a courtroom and it is not in front of a judge.  In fact, the Chapter 13 hearings in our area take place at a local hotel.  A Trustee conducts the hearing and it shouldn’t even last very long.  If you have an attorney, he or she will accompany you and sit beside you during the hearing.

In conclusion, a good bankruptcy attorney will take your financial situation into account and put you into the proper bankruptcy chapter.  Your attorney will also guide you through all the steps and be by your side through the whole process.

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