In times of financial distress, individuals facing overwhelming debts often turn to bankruptcy as a lifeline to regain control of their finances. Bankruptcy is a legal process that offers individuals the opportunity for a fresh start by discharging or restructuring their debts. Two common types of personal bankruptcy under the United States Bankruptcy Code are Chapter 7 and Chapter 13. Each has its unique characteristics, eligibility criteria, and legal implications.
Chapter 7 Bankruptcy: Liquidation And Debt Discharge
Chapter 7 bankruptcy, often referred to as “liquidation bankruptcy,” is the most common form of personal bankruptcy. It involves the liquidation of a debtor’s non-exempt assets to pay off creditors and, in return, grants the debtor a discharge of most unsecured debts. This type of bankruptcy is suitable for individuals who have minimal income and are unable to repay their debts.
Eligibility Criteria
To qualify for Chapter 7 bankruptcy, you must pass the means test, which assesses your income, expenses, and debt. If your income falls below the state median or if you can demonstrate that you have no disposable income, you are likely eligible for Chapter 7.
The Automatic Stay
Once a Chapter 7 bankruptcy is filed, an automatic stay is immediately enacted. This legal provision prohibits creditors from pursuing collection actions, such as wage garnishment, foreclosure, or repossession, during the bankruptcy process.
Liquidation Process
A Chapter 7 bankruptcy trustee is appointed to oversee the liquidation of non-exempt assets. However, many states have exemption laws that allow debtors to retain certain essential assets, such as their home or car, up to a specified value.
Debt Discharge
Upon the completion of the liquidation process, most unsecured debts, such as credit card debts and medical bills, are discharged. Certain debts, like student loans and child support, are usually not dischargeable.
Chapter 13 Bankruptcy: Repayment Plan For Financial Recovery
Chapter 13 bankruptcy, also known as “reorganization bankruptcy,” offers a different approach to debt relief. Instead of liquidating assets, Chapter 13 allows debtors to create a repayment plan spanning three to five years to gradually pay off their debts. This type of bankruptcy is suitable for individuals with a regular income who can afford to make monthly payments towards their debts.
Eligibility Criteria
To qualify for Chapter 13 bankruptcy, you must have a stable source of income to meet your living expenses and fulfill the repayment plan.
The Repayment Plan
Under Chapter 13, a debtor proposes a repayment plan to the bankruptcy court. This plan outlines how creditors will be paid over the designated period. It may involve reduced interest rates, extended repayment terms, or even partial debt forgiveness.
Protection from Creditors
Similar to Chapter 7, Chapter 13 initiates an automatic stay, preventing creditors from taking any collection actions against the debtor while the repayment plan is in effect.
Debt Discharge
Once the debtor successfully completes the repayment plan, any remaining unsecured debts are typically discharged. Chapter 13 also offers the advantage of potentially reducing or restructuring secured debts, such as mortgage arrears.
At Pioletti Pioletti & Nichols, our experienced bankruptcy attorneys are well-versed in the intricacies of Chapter 7 and Chapter 13 bankruptcy laws. We are dedicated to helping you navigate the legal process and guiding you towards a fresh financial start. If you are considering bankruptcy or need expert legal counsel, don’t hesitate to contact us today for a confidential consultation with a skilled bankruptcy lawyer in Effingham, IL.