The bankruptcy code is like a book in a library. All the titles in the United States Code, the federal statutes, are numbered. The bankruptcy code is Title 11. Like any book, the bankruptcy code has chapters. For consumers and small businesses, the main Chapters of concern are Chapters 7 and 13.
Continuing on the book theme, Chapter 7 is entitled Liquidation. Theoretically, a debtor must turn over all his or her assets to a person known as a trustee, whose job it is to liquidate the assets for the benefit of creditors. As a practical matter, most consumer bankruptcies are determined to be “No Asset” as all the assets either have little equity or are exempt under state or federal law. So, as a practical matter, most consumer Chapter 7 bankruptcies do not result in the loss of any assets. Rather, the debtor simply receives a discharge of most of their unsecured debt. A discharge is the term for elimination of debt.
Due to its sweeping relief, Chapter 7 is only available to those debtors with little or no disposable income. Since the vast majority of Chapter 7 debtors receive a discharge, as opposed to having their cases dismissed or forced to switch to Chapter 13, it is clear that the overwhelming majority of people who file Chapter 7 cannot afford to repay their debts.
For those people who can afford to pay something to their creditors, as opposed to nothing in a Chapter 7, Chapter 13 can provide relief. Chapter 13 is entitled Individual Debt Adjustment. It essentially amounts to a repayment plan. The good news is that a Chapter 13 debtor need only pay unsecured creditors what he or she can afford to pay, as long as they receive at least what they would have in a Chapter 7. Unlike credit counseling repayment plans that require the counseling agency to negotiate with creditors, no negotiation is required and no interest is charged. The balances are fixed at the time of filing.
Chapter 13 is also an invaluable tool to help homeowners stay in their homes. The 13 plan can be used to repay arrears owed on a mortgage over the life of the plan. Since mortgage companies will usually only allow a very short repayment plan, about 4-6 months, the 60 months afforded by Chapter 13 can be a lifesaver.
Finally, Chapter 13 can be used to repay tax debt that is not dischargeable in a Chapter 7. Chapter 7 will eliminate income tax debt that was due more than 3 years before filing, as long as the returns were filed more than 2 years before filing. But all other tax debt is not discharged and Chapter 13 will allow a debtor to repay that over 5 years. Of course, in every Chapter 13, the debtor must be able to afford the monthly payment, a concept known as feasibility.
Whenever you are having difficulty with debts, you should call or e-mail a lawyer who handles this area of law, preferably on a free initial basis. The lawyer can evaluate your situation, determine if bankruptcy is right for you, and which Chapter you qualify for.