For individuals, bankruptcy law provides two
solutions: Chapter 7 and Chapter 13. Each is created
under a different chapter of the Bankruptcy Code.
Chapter 7: Generally is a straight bankruptcy:
you have limited income and your assets are with
the exemption provided by bankruptcy law.
Chapter 7 usually involves a creditor’s hearing,
which mostly takes about 10-15 minutes of general
questions. And then you get your discharge about
90 days after filing bankruptcy.
Chapter 13: if you have assets or higher income then
you belong in this chapter. The law allows you to pay your
creditors in monthly installments over three to five years.
This chapter is much harder to prepare: A Chapter 13 plan shall
be prepared to indicate the amount of money you can afford to
pay per month and how to allocate the payments.
This plan shall be approved by the bankruptcy court and t
he trustee. Sometimes it takes more than one trip to the court
and attempts to modify your plan. To be qualify for this chapter,
your unsecure debts shall be less than $360,475 and less than
$1,081,400 in secured debt.
If your debt exceeds these limit you shall consider Chapter 11
bankruptcy. Chapter 13 is often used when your equity in your
property exceeds the exemption in Chapter 7, or your income is
much higher than the limit. For example, you might have a house
that's worth $500,000 with a mortgage of $400,000. Therefore,
you have an equity for $100,000. There is a exemption for
$75,000 and the rest of $25,000 is not exempt. In this situation,
you might file a chapter 13 bankruptcy and pay a monthly payment
to trustee for three to five years, and then you get a discharge.
Also, you can use Chapter 13 bankruptcy when you are behind
in your mortgage payment and you are unable to make it current.
In Chapter 13 bankruptcy, you are able to pay the arrears within
3 to 5 years. Another use of Chapter 13 is when you have a
second mortgage and want to erase it. If your house, for
example, is worth $500,000, and you have a mortgage for
$550,000, which is higher than the value of the house,
then you can make the second mortgage unsecured.
Then, after the discharge of your bankruptcy, the second mortgage
will disappear as well.
Lastly, some debt may not be discharged in Chapter 7 but can
go away in Chapter 13. As an example, fraudulent debts are
not dischargeable in Chapter 7, they might be discharged in
Ultimately, your taxes you owe to IRS are not dischargeable but
can be repaid in Chapter 13 within three to five years.