Do you have serious debt and can no longer maintain the payments on that debt? Bankruptcy may be an option to assist in reducing or eliminating that debt. However, in order to file bankruptcy, certain requirements must be met. There are two types of individual bankruptcies that one can file. Chapter 7 bankruptcy – – which is also referred to as a liquidation bankruptcy, or Chapter 13 bankruptcy – – which is a reorganization bankruptcy.
No matter which filing is the best option for a particular debtor, significant information must be collected prior to any filing of a Petition. A debtor must provide a list of his creditors, a list of his assets, a budget which contains his income and his expenses, documents such as pay stubs, tax returns, bank account statements, titles to assets, etc. It is better to over disclose to the bankruptcy Trustee than to under disclose. Not only will it save time and prevent the Trustee from having to request additional information, it can also help the debtor establish credibility with the Trustee.
Typically, to file a Chapter 7 bankruptcy, a debtor must have limited income and be unable to pay back their debts. To qualify, a debtor’s disposable income must be less than median income for the state in which he lives. If the debtor’s income is not below the income allocated in his state, that debtor must then pass the Chapter 7 “means test” to qualify to file a Chapter 7 bankruptcy. Disposable income is the amount of income a debtor has left after essential living costs. If a debtor is found to have the ability to repay even “some” of his debts, that debtor will be required to file a Chapter 13, rather than a Chapter 7 bankruptcy.
In cases where a debtor qualifies for a Chapter 7 filing, the Bankruptcy Trustee will sell the debtor’s property to pay off their debts. However, there are certain personal property assets that are exempt from being sold under both Federal law and State law. In Nevada, NRS 21.090 provides which assets are exempt under state law; meaning the assets listed in this statute cannot be executed upon or cannot be sold to satisfy debts in a bankruptcy. Chapter 7 bankruptcy cases, if approved by the Trustee, are usually completed within 3 – 6 months of filing. Completion of the case results in a discharge of the debts listed in the debtor’s Petition. This provides the debtor with a fresh start. However, a debtor must be aware that this type of bankruptcy can negatively impact his credit report for up to 10 years.
In a Chapter 7 bankruptcy, a debtor can retain an amount of equity in his home. This is known as the Homestead Exemption and the amount varies from state to state. The current Homestead Exemption amount in Nevada is $605,000.00.
In a Chapter 13 bankruptcy, property is not typically sold to pay debts, but rather a payment plan in which to pay the debts is presented to the bankruptcy Trustee for approval. A debtor in a Chapter 13 typically has regular income and the ability to pay back some of his debts.
The purpose of a payment plan is to reorganize the debts of the debtor and provide a payment plan in which to pay creditors a portion of the outstanding debt over a period of time. Payment plans can be anywhere from 36 – 60 months. Secured debts receive priority and are paid first. Next unsecured priority debts are paid, such as tax liabilities. Any remaining funds will be used to pay unsecured debts. Examples of secured debts would be 1) a mortgage, secured by a home; or 2) a car loan, secured by the vehicle Examples of unsecured debt would be credit card debt or medical bills.
In some instances, any remaining unpaid unsecured debt may be discharged upon the completion of the repayment plan, however, the creditors of unsecured debts must be paid an amount equal to the value of nonexempt assets in which the debtor retains. A bankruptcy Trustee can also take a debtor’s tax refund to pay debts.
A debtor cannot have more than $394,725.00 of unsecured debt or more than $1,184,200.00 of secured debt in a Chapter 13.
A Chapter 13 bankruptcy is not complete until all payments of the plan are made. Therefore, completion of this type of bankruptcy can take 3 – 5 years, depending on the length of the repayment plan. Once the plan is complete, any remaining unsecured debts can be discharged. A Chapter 13 bankruptcy can negatively effect a debtor’s credit score and remain on a credit report for 7 years.
Mortgages, car loans and student loans cannot be eliminated in either a Chapter 7 or Chapter 13 bankruptcy. Unlike a Chapter 13 bankruptcy, in a Chapter 7 bankruptcy, there is no “plan” in which a debtor can become current on missed payments, therefore a possible foreclosure or repossession can occur. A Chapter 13 contemplates payments to secured creditors such as a mortgage. And, while student loans may go into forbearance during a bankruptcy, they are never dischargeable.
Upon the filing of a petition for bankruptcy, an automatic stay is issued, and all noticed creditors must stop the harassing calls to the debtor. This is usually a great relief.
Each case can have a different outcome based upon the specific circumstances of the debtor and the above is simply a general overview of the differences between Chapter 7 and Chapter 13 bankruptcies. A consultation with an attorney can clarify specific issues relating to each debtor.
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