While many people file for bankruptcy, the type or chapter of bankruptcy they file and the reasons for filing vary widely. The Bankruptcy Code provides four different chapters of bankruptcy that individuals may seek relief under. I am going to briefly discuss the most common chapters, 7 and 13, below, providing the pros and cons of each:
Chapter 7 Bankruptcy
By a large margin most people that file for bankruptcy relief file under chapter 7 of the Bankruptcy Code. In a chapter 7 bankruptcy you can eliminate most debts and thanks to Arizona’s exemptions laws most are able to retain all of their property.
Quick (at least by federal court standards): The typical chapter 7 bankruptcy takes approximately 4 to 5 months to complete.
No Pay Back of Debts: In a chapter 7 bankruptcy your debts will be divided into two groups, secured debts and unsecured debts. Your credit card debt falls into the unsecured debt category. With the exception of most taxes and student loans, all of your unsecured debts will be discharged – or eliminated – through a chapter 7 bankruptcy filing. Secured debts like your home or your car must continue to be paid or you risk repossession or foreclosure.
Automatic Stay: Immediately upon the filing of your chapter 7 bankruptcy case the bankruptcy court will issue an order called the “automatic stay.” This order stops all collection efforts against you and your property. Creditors cannot sue you, garnish wages or bank accounts, send you collection letters, or even call you on the telephone. Many of my clients file for bankruptcy to stop garnishments and foreclosures.
Liquidation: Chapter 7 bankruptcy is a liquidating bankruptcy – meaning that if you have assets that you own free and clear of any liens and that are not protected by one of Arizona’s exemption laws (i.e. the homestead exemption), you risk losing it a chapter 7 bankruptcy filing. For example, if you owned a fishing boat that had a value of $2,000 and you did not owe any money on it, in a chapter 7 bankruptcy case the trustee assigned to your bankruptcy case may cease the boat and sell it to pay your creditors. That being said, Arizona’s exemptions cover most of the general assets that people have and in 94% of chapter 7 bankruptcy cases in Arizona no property is taken.
Qualifying for a Chapter 7 Bankruptcy: Back in 2005 Congress amended the Bankruptcy Code and now you must qualify to file a chapter 7 bankruptcy. Qualification is based upon family size and income. You must make at or below the average income for a family of your size in your state in order to qualify. For instance, a family of two in Arizona must make less than $54,510 per year or $4,542 per month in order to qualify to file a chapter 7 bankruptcy. If you make more, you will likely have to file a chapter 13 bankruptcy.
Real Estate Issues: While a chapter 7 bankruptcy can stop a foreclosure sale from going forward, it does not have the needed tools to be a long term solution to issues with your home. For instance, if you are behind on your house payments you will be required to get the payments caught up immediately and begin paying your monthly house payment as it comes due or risk foreclosure. A chapter 13 bankruptcy is much better suited to dealing with real estate issues.
Chapter 13 Bankruptcy
Great for Real Estate Issues: Chapter 13 bankruptcy has many powerful tools if you are looking to save a home from foreclosure. For instance, if you are behind on your house payment, you will be provided 3 to 5 years to get caught up on the missed payments. Further, if you have a second mortgage or home equity line of credit (HELOC), you may be able to eliminate it entirely through a process called “lien stripping.”
Retention of Assets: In a chapter 7 bankruptcy any non-exempt property can be liquidated to pay your creditors. In a chapter 13 bankruptcy case you will remain in possession of all of your assets whether they are exempt or not.
Lengthy Process: A chapter 7 bankruptcy can usually be processed in 4 to 5 months. A chapter 13 bankruptcy will be a minimum of 3 years and a maximum of 5 years. Chapter 13 bankruptcy cases are much longer as you will be required to propose a plan whereby your creditors will receive some of the money that you owe them.
Payment Required: In a chapter 13 bankruptcy you are required to make a monthly payment to the bankruptcy court over a 3 to 5 year period. This monthly payment will be used to partially pay your creditors.
If you are considering bankruptcy it is important to meet with a bankruptcy attorney to discuss your specific situation and determine what chapter is best for you. Bankruptcy is not a one size fits all and choosing the wrong chapter can have lasting consequences. I offer a free bankruptcy consultation where we can discuss your situation. I can be reached at (480) 648-8975.