What are the Different Types of Bankruptcy?

There are three types of bankruptcy that can be filed: Chapter 7, 11 and 13.

Chapter 7: Liquidation

Chapter 7 bankruptcy is available to individuals as well as businesses. Under the bankruptcy code a “person” for the purposes of filing bankruptcy is defined as an individual, partnership, and/or corporation. A Chapter 7 bankruptcy requires the collection of the debtor’s non-exempt property for sale or liquidation and the cash proceeds from the sale is paid on a pro rata basis to creditors with claims against the estate. Within 40 to 60 days after the filing of a Voluntary Petition for Chapter 7 bankruptcy, a meeting of the creditors occurs. The debtor must be present at the meeting of the creditors, but creditors need not appear to protect their claims. Chapter 7 bankruptcy generally eliminates a debtor’s debt and unsecured creditors generally receive no or minimal payment for their claims. Secured creditors continue to be paid in full if the individual wishes to keep the secured property. If the individual does not want to keep the secured property, the individual may return the secured property/collateral (for example, a vehicle or house). Once the secured property is returned, the secured creditor may take no further action against the individual for collection. The return of the property is considered full and final payment no matter how much is owed and no matter how much the property is worth.

Chapter 11

Like a Chapter 7 bankruptcy, any person (individual, corporation or partnership) may file a Chapter 11 bankruptcy petition. In a Chapter 11 bankruptcy the debtor typically remains in control of the business and the property of the bankruptcy estate as the “debtor-in-possession”. The debtor-in possession is an official title with the bankruptcy court and requires the debtor to assume the duties, responsibilities and powers that a trustee would in the administration of an estate. In a Chapter 11 bankruptcy, the Debtor is granted 120 days from the date of filing a Chapter 11 petition in which to propose a plan for reorganization of its debt and/or business. The plan details what the Creditors will be paid, how much they will be paid, and when. The creditors have the right to reject or accept the Plan.

Chapter 13: Reorganization

Chapter 13 bankruptcy is designed to restructure the debts of an individual. In a Chapter 13 bankruptcy case, individuals file a Plan to repay some or all of their debts over a period of time (usually 60 months). The amount that must be paid to creditors is determined by an individual’s specific income and expenses. When individuals file a Chapter 13 case, they will begin to make one monthly payment to the Chapter 13 trustee as determined by their Plan. The trustee will distribute the payment to the creditors. Once all of the Plan payments are made, the individual will be granted a discharge.

How do I Know What Type of Bankruptcy to File?

The type of bankruptcy an individual may file is based on the individual’s income and expenses and how it compares to what is considered the “median” annual income for the individual’s state. It also depends on the size of the individual’s household and specific expenses. At the initial bankruptcy consultation, an attorney will discuss what type of bankruptcy is available for the particular situation. In some cases, it is necessary for an individual to provide your financial documentation before the attorney can accurately determine the type of bankruptcy that is appropriate.

What Does a Bankruptcy Include?

Individuals who file for bankruptcy relief get to breathe again. Foreclosure, lawsuits, calls from creditors, garnishments and any other collection activity against the individual will end or be “stayed”. Harassment ends and creditors may no longer contact the individual who has filed for bankruptcy. Upon filing a bankruptcy case, the bankruptcy court imposes what is called an “automatic stay” which prohibits creditors from taking any further action against the debtor without express permission of the bankruptcy court. The stay is automatic and creditors that violate it may be sanctioned by the bankruptcy court. At the time of filing a Chapter 7 or Chapter 13 bankruptcy, the individual will be appointed a “trustee” that will administer the bankruptcy estate. The “bankruptcy estate” is all the property that an individual owns at the time of filing. The trustee will require that individuals provide documentation of their financial situation to prove the accuracy of their statements regarding their financial affairs.

What Bills Can I Keep Paying?

After an individual decides to file bankruptcy, the individual may not purposely incur additional debt. For example, an individual that is going to file for bankruptcy must not continue to use credit cards or takeout new loans. An individual that is going to file bankruptcy may also not treat any creditors preferentially. For example, the individual may not pay family members back for loans instead of paying a credit card debt. All unsecured creditors must be treated equally. Continuing to pay for living expenses and insurance is always appropriate.

Where Do I Begin?

After your initial consultation with one of our attorneys, we will provide you with a comprehensive list of the documents you will need to provide to us prior to filing your bankruptcy case.

However, listed below are the main items we will need in order to determine whether or not you are able to file a Chapter 7 or a Chapter 13 bankruptcy case:

•  Tax returns for the past four years
•   Six months of pay stubs for you and your spouse
•   Documentation of any additional income you receive or have received from any source during the last 6 months
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I'm Think I'm Ready to File. What Next?

Provide all of the documentation necessary to file your case. We will give you a list of documentation necessary and once we have received all of your documents that we will be able to prepare your case.

Once we have all of your documentation, we will provide you with the information necessary to complete the credit counseling class that is necessary prior to filing your bankruptcy case. It takes about an hour to complete and can be done on the Internet or by phone. You may not file a bankruptcy unless you have completed a credit counseling class within 180 days PRIOR to filing your bankruptcy case.

Once we have prepared the documents called “Schedules” that detail your assets and debts, you will meet with an attorney to review your case and make sure all of the Schedules are accurate.

Once your case is filed with the bankruptcy court, you will be appointed a trustee and given a date for a “Creditor’s Meeting” approximately 45 days after filing your bankruptcy. You must attend the meeting. It is scheduled for approximately an hour, but usually only takes 10 minutes depending on how many other meetings are scheduled at the same time. We will let you know where and when you will need to appear. An attorney will attend the meeting with you and you will need to show your government-issued photo identification (driver’s license or passport is fine) and your social security card (if you do not have one, you can provide an original pay stub). The trustee will ask you any questions he or she has about your financial affairs as of the date of filing your bankruptcy case.

After filing your bankruptcy, you will need to complete a financial management course. It will take approximately one hour of time to complete and can be done via Internet or phone.

If you have filed a Chapter 7 bankruptcy and there are no assets for the trustee to sell to pay your creditors, you will obtain a discharge from the bankruptcy court within 6 months.

If you have filed a Chapter 13 bankruptcy, you will need to make your Plan payments from the date you file bankruptcy until you have completed your Plan (typically 60 months).

If you have filed a Chapter 13 bankruptcy, another hearing will be set to confirm/approve your Plan. You need not attend this hearing. Once the Chapter 13 Plan is confirmed/approved, you will continue to make your Plan payments for the duration of the Plan and after you have made all of your payments, you will be granted a discharge by the court.

What Costs Are There?

During your free initial consultation, we will be able to determine if bankruptcy is an alternative for you. Sometimes filing bankruptcy is not the right solution for a particular client or the client needs to wait a period of time prior to filing bankruptcy. During that time, we will create a plan for you to pay your attorney’s fees.

The filing fee for a Chapter 7 bankruptcy is $299, and the filing fee for filing a Chapter 13 case is $274.

Why do I need an attorney?

Bankruptcy is a complicated process. There are many document preparation services that will provide individuals with the necessary documents to file their own bankruptcy case, and these services will charge a fee to help individuals fill out the forms. However, document preparers may not provide any legal advice as they are not attorneys licensed to practice law. Even telling individuals whether or not they should file a certain chapter bankruptcy case is giving legal advice.

In addition, any mistakes that are made are considered the individual filing the bankruptcy case and individuals may lose their property or be dismissed from bankruptcy because they did something wrong.

If individuals choose to represent themselves and/or use a document preparer to prepare your bankruptcy documents, they are responsible for acting as an attorney which means they must make sure that all of the filings of your case are made correctly and in a timely fashion. They will not be excused for mistakes because they did not “know”. The law requires that individuals acting as an attorney on their own behalf know the law and if they do not know the law there is not any excuse or “do-over”. Many individuals file their own case only to have it dismissed because it was not filed properly and then the individual must hire an attorney to fix the problem. Ultimately, the individual will end up paying more in fees and costs than he or she would have had an attorney been hired in the first place.

In addition, because of a bankruptcy dismissal the individual may have lost property that could have been saved or may not be able to file another bankruptcy case.

What Should I Expect After Bankruptcy?

What is a “discharge” from bankruptcy?

A “discharge” from bankruptcy is the Court order stating that the debtor has met all of the requirements of the debtor’s bankruptcy and all the debts subject to the bankruptcy are considered eliminated. Any debt that is discharged no longer needs to be paid, and the creditor may never take any action against an individual for collection of a discharged debt.

In all bankruptcies, there is some debt that is not dischargeable, and the individual will continue to have to pay it even after a discharge. These debts are debts for payment of child support, alimony, criminal restitution and fines, student loans (depending on the type) and most taxes (sometimes can be discharged, but is rare). In addition, if a creditor believes that the individual has committed fraud by transferring property prior to filing bankruptcy or hidden assets, the creditor may ask the bankruptcy court to make the creditor’s debt non-dischargeable which means that the individual would have to pay that debt no matter what the outcome of the bankruptcy.

How does bankruptcy affect my credit report?

Bankruptcy will be on an individual’s credit report for 10 years after the date of the bankruptcy discharge. However, if individuals are in a situation where bankruptcy is appropriate, chances are their credit is not good anyway.

Bankruptcy affords individuals a way to get a clean slate and re-establish their credit. All creditors are aware of the bankruptcy code. Many Creditors extend credit to individuals that have filed bankruptcy because the creditor knows that a person discharged from bankruptcy may not file a Chapter 7 case for 8 years after discharge and may only file a Chapter 13 (which would allow for the Creditor to be potentially re-paid some amount) in certain other circumstances. An individual that is discharged from bankruptcy has less debt than those who are struggling to pay their bills under high interest rates, late fees and overlimit fees.