FAQ: What Do The Different Bankruptcy Chapters Mean – And What Assets Can You Retain?

FAQ: What Do The Different Bankruptcy Chapters Mean - And What Assets Can You Retain? 2

While bankruptcy is commonly understood in the general sense, many people fail to understand the several different types of bankruptcy and what those differences are.  And what difference do different jurisdictions mean for bankruptcy chapters and terminology?

The ‘chapters’ spoken about in this context is the section of the Bankruptcy Code that deals with bankruptcy law.

But first, consider some of the common terms that are heard when we talk about bankruptcy – ​​: 

  • Unsecured debt: As the name implies, unsecured debt has no security, which means no collateral backing. A loan that is issued to a borrower is solely based on their creditworthiness and ability to repay.
  • Exempt property: this is a property that cannot be collected and sold to pay creditors. Federal bankruptcy law and the state of New York determine what is exempt property, but you cannot pick and choose whether or not you want to follow New York’s list or the federal list.

Choosing which bankruptcy ‘chapter’ is applicable to your own situation will depend upon a number of factors including whether you are facing bankruptcy as an individual, a corporation, what the nature of the debt and potential debt repayments might be, where you are located (in terms of any particular State legal requirements) and so forth.  We are writing this, for instance, as a Long Island bankruptcy attorney and anyone facing bankruptcy needs an attorney who knows the local laws and situation, including what issues may be exempt.  Examples of exempt property include equity in a vehicle; pensions, annuities, retirement accounts; unemployment compensation, and reasonably necessary clothing and household goods.

It is important to know what the local state law requirements are, such as those assets that are court-protected from sale (see below).  Mostly there will be a requirement to reaffirm a debt if personal items are to be retained but, once again, this will depend upon the jurisdictional and other issues.

Chapter 7 Bankruptcy

If you are an individual who is having difficulty paying off creditors, then under Chapter 7 bankruptcy, a trustee can liquidate your non-exempt assets to raise money to pay off those creditors.

Chapter 7 is the most common of the bankruptcy ‘chapters’, which will see a court-appointed trustee handle the sale of your assets so long as you meet the appropriate eligibility requirements to enter Chapter 7.

What are the eligibility requirements?

It requires you to take a means test.

If your average monthly income from that time period is less than the median income for the same-sized household in your state, then you can qualify for Chapter 7 bankruptcy. If you have very little disposable income, you may be eligible for Chapter 7 bankruptcy instead of chapter 13 bankruptcy. The process for filing for Chapter 7 usually takes about three months.

The most common situation facing those facing bankruptcy will be facing foreclosure but the situation regarding what may be retained in bankruptcy is never guaranteed.  For instance, while Chapter 7 may postpone a foreclosure the other issues such as retaining ownership of a retirement account or car are often achievable, but without any guarantee.

Credit card debts and other unsecured debts will usually be erased.  Taxes and student loans will typically be retained as debts due.

Chapter 11 Bankruptcy

Often called reorganization bankruptcy, Chapter 11 bankruptcy allows for debt restructuring of an entity’s affairs, debts, and assets under the US bankruptcy laws. Generally, Chapter 11 bankruptcy cases are filed by businesses and are very complicated, so in New York, it’s best to seek the assistance of a bankruptcy attorney before attempting to file.

Restructuring may be ideal so that the debtor can pay a portion of their debt to their creditors without being overly burdened by it.  Mostly this will be an alternative that average bankruptcy actions will not be dealing with due to their nature and complexity.

Chapter 12 Bankruptcy

If you are a farmer or own a fishery and your debts do not exceed $10 million and more than 50 percent of your income is from farming, then chapter 12 bankruptcy may be the best option for you to help you get back on track financially. Not all bankruptcy attorneys represent clients filing for Chapter 12 bankruptcy, so you need to speak to an attorney specializing in this type.

Chapter 13 Bankruptcy

Also called “the wage earner’s plan,” this is a monthly repayment plan that is accessible to individuals who earn a regular wage and need to restructure their debt while being able to keep some other property.  It will also permit the repayment of part of the debt with the actual repayment amount dependant upon your income, which will also see the Court requiring that you submit to them and adhere to a strict budget.

Usually, the reorganization plans last between three and five years. Creditors are not allowed to continue collection attempts during that time frame and are prohibited from starting collection attempts if they haven’t done so already. Chapter 13 bankruptcy allows you to keep your home and catch up on mortgage payments under the supervision of a court-appointed trustee.

Conclusion

Entering or even contemplating bankruptcy is an emotionally and financially challenging time.  Choosing between which chapter to enter (usually the choice will be between Chapter 7 and Chapter 13) is difficult in itself and requires careful consideration of a range of factors and good legal and accounting or financial assistance.

Remember that you can also be pursued vigorously by the Court under a Chapter 13 scenario and there are the other repercussions from any such default.

Source: Macco Law

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