Chapter 7 Bankruptcy
A Chapter 7 bankruptcy is typically filed by people who have little or no income left after paying their basic monthly living expenses (rent, utilities, car payment, food, furniture payments, etc.).
In a Chapter 7 bankruptcy, most unsecured debts are wiped out and the person does not have to repay them due to the bankruptcy discharge. Unsecured items are those that are not secured by any collateral. This includes things like credit cards, medical bills, utility bills, cars that have been repossessed, etc. In other words, if a person owes a bill for something and they don’t pay the bill — can the company come and take something they own? If not, the debt is most likely unsecured. If the company can come and repossess physical items from the person if they don’t pay the bill (like a mortgage, car, furniture, etc.) then the debt is normally “secure.”
Secured debts can be handed back to the debt company, or have a reaffirmation agreement created that allows you to keep the item and continue making payments. Sometimes the secured debt can also be renegotiated if it is no longer worth what is owed on the item. In a chapter 7 bankruptcy you will make this decision on the Statement of Intention on the bankruptcy forms and then the court must approve the decisions.
In addition, if someone has taken a personal loan but listed items they own to secure the collateral — this debt could also be a secure loan. Normally overdraft protection accounts and personal lines of credit extended without security are considered unsecured debts.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy is a debt repayment plan. A person must be employed to be granted a Chapter 13 bankruptcy so they can make regular payments to the Bankruptcy Court. The payments they make to the court are then distributed among the creditors.
Today a bankruptcy filer can be forced into a chapter 13 bankruptcy if the court determines they have too much disposable income on the bankruptcy means test when you try to file ch7. If you can pay at least 25% of your debts you will most likely have to file a ch 13 instead of a ch 7 bankruptcy.
If you are approved for a chapter 13 you will make payments up to 5 years to the bankruptcy court, but won’t necessarily have to pay all of your debts off, the court may negotiate to allow you to pay a portion of your debts, and after the ch 13 plan is paid off the rest of the debts would be discharged.
Chapter 13 bankruptcy is popular among consumers that are facing foreclosure currently as missed mortgage payments and legal fees can be written into the payment plan in order to stop the foreclosure proceedings.