Although there are 6 different chapters of the bankruptcy code, individuals generally file under either Chapter 7 or Chapter 13. Both chapter 7 and chapter 13 bankruptcy offer distinct advantages for the debtor, but determining which chapter is appropriate, given the individual circumstances of each case, lies within the expertise of an experienced bankruptcy attorney. Our firm will assist each client in determining which chapter of the bankruptcy code is best for them, as well as present that client with alternatives to filing bankruptcy, such as debt negotiation and/or consolidation.
Chapter 7 Bankruptcy Overview
Under chapter 7 bankruptcy, an individual who meets certain specific requirements may be able to eliminate (or ‘discharge’) most or all of their debt in a relatively short period of time. Although many people incorrectly believe they will lose all of their possessions upon filing bankruptcy, Chapter 7 bankruptcy (also known as ‘liquidation’ or ‘straight bankruptcy’) & Chapter 13 bankruptcy allow the individual debtor to keep certain ‘exempt’ property (see below).
If a chapter 7 debtor owns property exceeding the allowable amount (‘unexempt’ property), that property is subject to being sold by the ‘Trustee’ for the benefit of the debtor’s creditors. The Trustee is an individual who works with the bankruptcy court and is responsible for the administration of your case. Simply because you may own assets exceeding the exemption limit does not mean the trustee will seize and sell the ‘unexempt assets.’ The trustee has the discretion to sell unexempt assets or not, depending on many factors, such as the value of the asset (less any lien), the cost/burden of selling the asset, as well as additional factors.
Usually in a chapter 7 bankruptcy unsecured debts (example: credit cards, medical bills, signature loans) are discharged, while certain debts remain intact. Examples of debts that are not subject to discharge (and thus will remain after the bankruptcy) include: child support, income taxes less than 3 years old, property taxes, student loans (unless the debtor prevails in a difficult-to-win adversary proceeding brought to determine the dischargeability of the student loan), fines & restitution imposed by a court for any crimes committed by the debtor, property settlements pursuant to a divorce decree and spousal support.
Chapter 13 Bankruptcy Overview
In a Chapter 13 bankruptcy, the debtor files a repayment plan with the bankruptcy court to pay back all or a portion of your debts over time. The repayment plan can last 3 to 5 years, whereby the debtor will be responsible for making regular payments to the bankruptcy Trustee. The amount the debtor is responsible for paying back depends on the debtor’s income, the amount and types of debt owed and how much property/assets the debtor owns, in addition to other considerations.
Chapter 13 bankruptcy offers a debtor advantages which are unavailable in a chapter 7 filing, such as ‘cramming down’ a mortgage, curing mortgage arrearages over time and ‘cramming down’ car loans to reflect current market value (under certain circumstances). Listed below is a non-exclusive list of some of the benefits which can be realized with the filing of a chapter 13 bankruptcy.
Exemptions (Chapter 7 & 13)
Every state has outlined certain exempt assets that a debtor is allowed to keep, with some examples of Kansas exemptions listed below:
Homestead unlimited (must be 1 acre within city / 160 acres outside city)
Household goods / Clothing unlimited
Vehicle $20,000.00 equity cap per vehicle (1 vehicle per debtor)
Jewelry $1,000.00 cap per debtor
Tools of the trade $7,500 cap per debtor
Retirement benefits No Monetary Limit
Unemployment benefits No cap
(THE ABOVE LIST IS NOT EXCLUSIVE & IS ONLY AN EXAMPLE OF SOME OF THE AVAILABLE EXEMPTIONS UNDER KANSAS LAW)
Advantages (chapter 7 & 13)
The filing of a bankruptcy has many advantages, depending on what the debtor is trying to accomplish and which chapter of the bankruptcy code the debtor has filed under. Listed below are some of the advantages a debtor in bankruptcy can take advantage of:
- Redemption – The debtor can ‘redeem’ a vehicle, thereby only paying the current lienholder fair market value at the time the bankruptcy is filed. EXAMPLE: If the debtor owes $22,000 on their vehicle and the fair market value is only $8,000, a qualified debtor can secure financing from a lender who specializes in Chapter 7 bankruptcy redemption funding and end up only owing $8,000 on the vehicle. Our firm will assist debtors through the redemption process. (7 only)
- Eliminate Debt – For most clients, virtually all debts are eliminated in a chapter 7 bankruptcy, especially unsecured debts (credit card, medical and signature loans), allowing the client to get a ‘fresh start.’ Chapter 13 debtors will have to pay back some or all of their unsecured debt.
- Stop Eviction – In many cases (depending on the stage of the eviction), eviction proceedings will immediately stop upon the filing of the bankruptcy petition. (7 or 13)
- Stop Foreclosure – Upon the filing of the bankruptcy petition, foreclosure proceedings in which the debtor is named as a party will stop. This is due to the ‘automatic stay’ provision in bankruptcy which ‘stays’ or stops legal action once the bankruptcy has been filed. (7 or 13)
- Surrender – If a debtor wishes to dispose of a secured asset (an asset that has a loan attached to it), such as an unwanted car, boat or house, the debtor can accomplish this within the bankruptcy proceeding. This available option frees the debtor from having to go through the process of trying to sell an asset. Debtors will often times choose to surrender an automobile when they feel that it does not make financial sense to hold onto the vehicle. Houses are also frequently surrendered in bankruptcy when the debtor no longer wishes to keep the property, nor do they want to go through the burdensome process of trying to sell the property (especially when they will likely not receive any profit from the sale of the house). (7 or 13)
- Stop Creditor Calls – The filing of a bankruptcy will stop creditor calls in their tracks! This is due to the ‘automatic stay’ that immediately goes into effect upon the filing of the bankruptcy. If a creditor continues to call you or anybody else in relation to your debt, they will be violating federal law. Violation of this federal law will result in severe penalties for the creditor. (7 or 13)
- Stop Collection Efforts – Once a bankruptcy has been filed, your creditors are no longer allowed to contact you by any means. This means no letters, calls, emails, personal visits and threats. (7 or 13)
- Stop Repossessions – The filing of a bankruptcy will immediately stop any repossession efforts on behalf of your secured creditors. Even if your vehicle was already taken into possession by the creditor, we may still be able to force the creditor to return the vehicle to you! (7 or 13)
- Stop Wage Garnishment – If your wages are being garnished, a bankruptcy filing can stop the garnishment immediately. (7 or 13)
- Cramdown – Under chapter 13 bankruptcy, a debtor can ‘cramdown’ a car loan if the financing on the vehicle is at least 910 days old. Meaning, If your car was financed more than 910 days ago (about 2 ½ years ago), it may be possible to reduce the amount owed on the vehicle to reflct current market value. EXAMPLE: Your car is worth $8,000, but you owe $22,000 on the vehicle, you will likely be able to ‘cramdown’ the loan to $8,000 and that amount will represent the new loan on the vehicle. The same cramdown option may be available for the debtor on an investment property, with certain restrictions and limitations. (13 only)
- Lien Avoidance – A debtor in bankruptcy may be able to avoid liens on real property and other assets, thereby eliminating the debtor’s liability associated with the lien. (7 and 13)
- Cure mortgage arrearages – Chapter 13 bankruptcy may allow a debtor 3 to 5 years to make-up missed mortgage payments. (13 only)
- Cure car payment arrearages – Filing a chapter 13 bankruptcy will allow a debtor to get caught-up with car payments over a 3 to 5 year period. (13 only)
- Numerous Additional Benefits – Bankruptcy offers numerous additional benefits to debtors. It is necessary to met with an attorney in order to explore these additional opportunities for relief. An attorney at our firm will take the time to explain the various benefits, as well as the drawbacks, bankruptcy has to offer.
Although bankruptcy can remain on the debtor’s credit report for 10 years (making credit less available or credit terms less favorable), high debt can also have the same effect. In fact, many debtors experience an increase in their credit score immediately following discharge in bankruptcy due to the fact that their credit report, which was once saturated with a high level of revolving debt, has been virtually wiped clean. While everybody cannot rely on this result, most people will find that they restore their credit much quicker than they had anticipated.
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