Types of Bankruptcy
Chapter 7 Bankruptcy
There are two types of bankruptcy for individuals—the discharge of debts and the payment plan. Chapter 7 of the Bankruptcy Code is for the discharge of debts, which is the traditional bankruptcy. Under Chapter 7, you either pay for or give up your property for secured debts. You surrender any nonexempt property in order to pay off as much of your other debt as possible. You keep all of your other exempt property and are forever released from any obligation to repay the remaining dischargeable debt.
One important requirement for a Chapter 7 bankruptcy is that you do not have sufficient income to allow you to pay at least a portion of your debts. Making this determination is largely a mathematical calculation, and there is a form for making the calculation. If you have enough income, you will need to file under Chapter 13 instead of under Chapter 7.
Chapter 13 Bankruptcy
In a Chapter 13 bankruptcy, you are not seeking to get rid of all of your debt entirely, but only to do one or a combination of the following:
- restructure your payments so they are more manageable, considering your income
- get rid of part of your debt so that you can manage payments
This can be done by spreading your payments over a longer period of time or by paying only a part of the loan. Either way, your monthly or weekly payment will be reduced. This type of payment plan can last up to five years. This means your finances will be under the watchful eye of the trustee during this time.
The two main things the trustee and the judge will consider in deciding whether to accept your plan are:
- whether the creditors are being treated fairly
- whether each creditor will receive at least as much as if you had gone with the traditional Chapter 7 bankruptcy
In a Chapter 13 case, the creditors' meeting is usually concerned with trying to reach a plan that will be acceptable to the creditors. You may spend some time negotiating with creditors as they try to get you to change your plan so they get more money or get it faster.
The creditors don’t need to agree with your plan, but if they do, it will be more easily accepted by the trustee and the judge. Even if the creditors object to your plan, it can still be approved as long as it is fair (in the judge's opinion, which usually relates to all creditors of the same type being treated equally) and as long as each creditor gets at least as much as if you had filed under Chapter 7.