Overview of Bankruptcy: Chapter 7 and Chapter 13
Chapter 7 bankruptcy allows a person to claim certain property as exempt property and
discharge (terminate the obligation to pay)debts that exceed your ability to pay. In Alabama these exemptions are limited and it is advisable to consult with a
Bankruptcy attorney to understand what those exemptions are. The Chapter 7
bankruptcy liquidation is designed primarily for the individual whose assets and
property are exempt from execution. Chapter 7 bankruptcy is used often to
eliminate unsecured debts such as credit card debt and medical bills. In
approved Chapter 7 cases the debtor will not be required to repay any of these
types of unsecured debts. This process takes all physical property that is not
exempt from execution, converts it to cash and then pays the proceeds to the
creditors. Once all notice to creditors and the bankruptcy law has been complied
with, the debtor will be discharged from such debts.
Chapter 13 bankruptcy is known as a wage earners plan and allows a debtor to make payments for
up to 60 months through the Bankruptcy Trustee.The Trustee, and Bankruptcy law determine the fair
distribution of property to creditors.
A Chapter 13 reorganization attempts to repay the creditors through a Chapter 13 plan over 60 months or less.
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analysis to determine whether Chapter 7 or Chapter 13 is appropriate for you.
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Chapter 7 Process
Entitled Liquidation, Chapter 7 contemplates an orderly, court-supervised procedure by which a trustee takes
over the assets of the debtor's estate, reduces them to cash, and makes
distributions to creditors, subject to the debtor's right to retain certain
exempt property and the rights of secured creditors. Because there is usually
little or no nonexempt property in most chapter 7 cases, there may not be an
actual liquidation of the debtor's assets. These cases are called "no-asset
cases." A creditor holding an unsecured claim will get a distribution from the
bankruptcy estate only if the case is an asset case and the creditor files a
proof of claim with the bankruptcy court. In most chapter 7 cases, if the debtor
is an individual, he or she receives a discharge that releases him or her from
personal liability for certain dischargeable debts. The debtor normally receives
a discharge just a few months after the petition is filed. Amendments to the
Bankruptcy Code enacted in to the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005 require the application of a "means test" to determine
whether individual consumer debtors qualify for relief under chapter 7. If such
a debtor's income is in excess of certain thresholds, the debtor may not be
eligible for chapter 7 relief.
Chapter 7 Eligibility
To qualify for relief under chapter 7 of the Bankruptcy Code, the debtor may be an individual,
a partnership, or a corporation or other business entity. 11 U.S.C. §§ 101(41), 109(b). Subject to
the means test described above for individual debtors, relief is available under
chapter 7 irrespective of the amount of the debtor's debts or whether the debtor
is solvent or insolvent. An individual cannot file under chapter 7 or any other
chapter, however, if during the preceding 180 days a prior bankruptcy petition
was dismissed due to the debtor's willful failure to appear before the court or
comply with orders of the court, or the debtor voluntarily dismissed the
previous case after creditors sought relief from the bankruptcy court to recover
property upon which they hold liens. 11 U.S.C. §§ 109(g), 362(d) and (e). In
addition, no individual may be a debtor under chapter 7 or any chapter of the
Bankruptcy Code unless he or she has, within 180 days before filing, received
credit counseling from an approved credit counseling agency either in an
individual or group briefing. 11 U.S.C. §§ 109, 111. There are exceptions in
emergency situations or where the corporations. 11 U.S.C. § 727(a)(1). Although an individual chapter 7 case
usually results in a discharge of debts, the right to a discharge is not
absolute, and some types of debts are not discharged. Moreover, a bankruptcy
discharge does not extinguish a lien on property.
Chapter 13 Process
Entitled Adjustment of Debts of
an Individual with Regular Income, Chapter 13 is designed for an individual
debtor who has a regular source of income. Chapter 13 is often preferable to
chapter 7 because it enables the debtor to keep a valuable asset, such as a
house, and because it allows the debtor to propose a "plan" to repay creditors
over time – usually three to five years. Chapter 13 is also used by consumer
debtors who do not qualify for chapter 7 relief under the means test. At a
confirmation hearing, the court either approves or disapproves the debtor's
repayment plan, depending on whether it meets the Bankruptcy Code's requirements
for confirmation. Chapter 13 is very different from chapter 7 since the chapter
13 debtor usually remains in possession of the property of the estate and makes
payments to creditors, through the trustee, based on the debtor's anticipated
income over the life of the plan. Unlike chapter 7, the debtor does not receive
an immediate discharge of debts. The debtor must complete the payments required
under the plan before the discharge is received. The debtor is protected from
lawsuits, garnishments, and other creditor actions while the plan is in effect.
The discharge is also somewhat broader (i.e., more debts are eliminated) under
chapter 13 than the discharge under chapter 7.
Chapter 13 Eligibility
Any individual, even if self-employed or operating an unincorporated business,
is eligible for chapter 13 relief as long as the individual's unsecured debts are less than $360,475 and
secured debts are less than $1,081,400. 11 U.S.C. § 109(e). These amounts are adjusted periodically to reflect changes in the consumer price index. A corporation or partnership may not be a chapter 13 debtor. Id.
An individual cannot file under chapter 13 or any other chapter if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor's willful failure to appear before the court or comply
with orders of the court or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens. 11 U.S.C. §§ 109(g), 362(d) and (e). In addition, no individual
may be a debtor under chapter 13 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency either in an individual or group briefing. 11 U.S.C. §§ 109, 111. There are exceptions in emergency situations or where the U.S. trustee (or bankruptcy administrator) has determined that there are insufficient approved agencies to provide the required counseling. If a debt management plan is developed during required credit counseling, it must be filed with the court.