Types of Bankruptcy
There are six basic types of bankruptcy cases provided under the Bankruptcy Code. The cases are traditionally given the names of the chapters that describe them. Determining which type of bankruptcy to file is based upon analysis of numerous factors, including income, assets, debt, type of debt and the consumer’s goal in filing bankruptcy, among other factors. Most consumers, however, will file bankruptcy under either Chapter 7 or Chapter 13.
A Chapter 7 bankruptcy, titled “Liquidation,” contemplates an orderly, court-supervised procedure by which a trustee (an individual who administers a bankruptcy estate, which is created by the filing of a bankruptcy) examines your assets to determine if any property is available to be sold or recovered for the benefit of creditors.
Certain property cannot be liquidated by the trustee because it is “exempt.” Unless you have lived in Florida less than two years prior to filing bankruptcy, Florida law governs which property is exempt from attachment by your creditors. In most cases, most of your property, including personal property, will be exempt under Florida law. Because there is usually little, or no, nonexempt property in most Chapter 7 cases, there may not be an actual liquidation of your assets. These cases are called “no-asset cases.”
If you are filing as an individual, you receive a discharge that releases you from personal liability for dischargeable debts. You usually receive a discharge just a few months after filing bankruptcy.
One of the principal advantages of Chapter 7 is that you emerge from bankruptcy without any future obligations on your discharged debts, obtaining a “fresh start.”
How Chapter 7 Works
A Chapter 7 case begins with you, the debtor, filing a petition with the bankruptcy court serving the area where you live. In addition to the petition, you also must file with the court: (1) schedules of assets and liabilities; (2) a schedule of current monthly income and expenditures; (3) a statement of financial affairs; and (4) a schedule of executory contracts and unexpired leases. All individuals filing bankruptcy must obtain credit counseling and must file a certificate of credit counseling.
A husband and wife may file a joint petition or individual petitions. Even if filing jointly, a husband and wife are subject to all the document filing requirements of individual debtors.
After the petition is filed, usually no more than 40 days afterward, the trustee will hold a “meeting of creditors.” During this meeting, the trustee puts you under oath, and both the trustee and your creditors may ask questions (usually about why you are filing bankruptcy, your current financial situation, etc.). If a husband and wife have filed a joint petition, they both must attend the creditors’ meeting and answer questions. Although referred to as a “meeting of creditors,” it is quite rare for a debtor’s creditors to attend. For most consumers, this will be the only meeting or court appearance that they will need to make during their bankruptcy. Some divisions of the bankruptcy court conduct the meeting of creditors via telephone such that the debtor never has to attend court in person during the bankruptcy process.
The Federal Rules of Bankruptcy Procedure provide for the clerk of the bankruptcy court to mail a copy of the order of discharge to all creditors, to you and to your attorney, if you have one. The notice informs your creditors generally that the debts owed to the creditors have been discharged and that any further collection activity is prohibited.
Chapter 7 Eligibility
One of the primary purposes of bankruptcy is to discharge certain debts to give you “fresh start.” Although an individual Chapter 7 case usually results in a discharge of debts, the right to a discharge is not absolute.
The 2005 amendments to the Bankruptcy Code included a “means test” intended to make it more difficult for wealthy consumers to file Chapter 7 bankruptcy. If your income is below the median family income for your household size, you need not worry about the “means test.”
If your income exceeds Florida’s median family income for your household size, you will need to fill out Official Forms 122A-1 and 122A-2 Statement of Current Monthly Income and Means Test Calculation.
If your current monthly income (CMI) exceeds Florida’s median income, then the “means test” applies a more complicated expense formula to arrive at your eligibility for a Chapter 7 bankruptcy. The formula starts with your CMI and then deducts several categories of allowed expenses to calculate your “net monthly income,” which is presumed to be available to pay general unsecured creditors. Eligibility for a Chapter 7 bankruptcy may require a detailed analysis of your income and expenses. If you “fail” the means test, you might not be eligible for a Chapter 7 bankruptcy. Being precluded from filing a Chapter 7, however, does not necessarily mean that you will be prohibited from filing a different type of bankruptcy.
A Chapter 13, titled “Adjustments of Debts of an Individual with Regular Income,” is often referred to as “reorganization.” A Chapter 13 is regularly filed by individuals who want to catch up on a past-due mortgage or car loan, modify their mortgage payment through bankruptcy, or otherwise attempt to keep assets that would not be protected in Chapter 7.
In a Chapter 13 case, you submit a plan to repay creditors all or part of the money owed to them over a three- to five-year period, usually funded from future income. If the plan meets the requirements set out in the Bankruptcy Code and is confirmed by the bankruptcy court, your payments under the plan are distributed to creditors by the Chapter 13 trustee.
Unlike in Chapter 7, you do not receive an immediate discharge of debts. You must complete the payments required under the plan before the discharge is received. You are protected from lawsuits, garnishments, and other creditor actions while the plan is in effect. A broader range of debts may be discharged in Chapter 13 than in Chapter 7.
How Chapter 13 Works
Similar to a Chapter 7 case, a Chapter 13 case begins with the filing of a petition, schedules, statement of financial affairs and counseling certificate. Rather than file a Statement of Current Monthly Income and Means Test Calculation, a Chapter 13 debtor files a statement of current monthly income and calculation of commitment period and dispensable income (Official Forms 122C-1 and 122C-2). A Chapter 13 plan must be filed with the schedules. The Chapter 13 plan is your proposal detailing when and how each creditor will be paid.
As in a Chapter 7 case, the trustee in a Chapter 13 case will schedule a meeting of creditors. You must attend the meeting and answer questions regarding your financial affairs and the proposed terms of the plan.
In a Chapter 13, you must submit a plan for court approval that provides for payments of fixed amounts to the trustee on a regular basis, typically monthly. The trustee then distributes the funds to creditors according to the terms of the plan, which may offer creditors less than full payment on their claims.
In a Chapter 13 case, to participate in distributions from the bankruptcy estate, unsecured creditors must file their claims with the bankruptcy court within 90 days after the first date set for the meeting of creditors.
If you want to keep the collateral securing a particular claim, the plan must provide that the holder of the secured claim receives at least the value of the collateral. If the obligation underlying the secured claim was used to buy the collateral (e.g. a car loan), and the debt was incurred within certain time frames before the bankruptcy filing, the plan must provide for full payment of the debt, not just the value of the collateral. The plan need not pay unsecured claims in full as long as it provides that you will pay all projected “disposable income” over an “applicable commitment period,” and as long as unsecured creditors receive at least as much under the plan as they would receive if your unprotected assets were liquidated under Chapter 7.
After the meeting of creditors, the court will hold a plan confirmation hearing to determine whether the plan is feasible. If the court confirms the plan, the Chapter 13 trustee will distribute funds received under the plan. If the court declines to confirm the plan, you may file a modified plan or convert the case to a liquidation under Chapter 7.
Once the court confirms the plan, you must make the plan succeed. You must make regular payments to the trustee, which will require living on a fixed budget for a prolonged period. Further, while confirmation of the plan lets you retain property as long as payments are made, you may not incur new debt without consulting the trustee.
You are entitled to a discharge upon completion of all payments under the Chapter 13 plan. The discharge releases you from all debts provided for by the plan, with certain exceptions. Debts that are not discharged in Chapter 13 include debts for alimony or child support, certain taxes, debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, and debts for restitution or a criminal fine included in a sentence on your conviction of a crime.
Creditors provided for in full or in part under the plan may no longer initiate or continue any legal or other action against you to collect the discharged obligations.
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