What Different Types of Bankruptcy Should I Consider?
There are two basic types of bankruptcy cases provided under the law:
Chapter 7 is known as “straight” bankruptcy. It requires a debtor to give up property which exceeds certain limits called “exemptions,” so the property can be sold to pay creditors. Usually, all property is exempt and you won’t lose anything.
Chapter 13 is called “debt adjustment.” It requires a debtor to file a plan to pay debts (or parts of debts) from current income.
Either type of case may be filed individually or by a married couple filing jointly.
If your income is above the median income for a family the size of your household in your state, you may have to file a chapter 13 case. If the consumer is found to have a certain amount left over that could be paid to unsecured creditors, the bankruptcy court may decide that the consumer can not file a chapter 7 case, unless there are special extenuating circumstances.
Chapter 7 (Straight Bankruptcy)
In a straight bankruptcy case, you file a petition asking the court to discharge your debts. The basic idea in straight bankruptcy is to wipe out (discharge) your debts in exchange for your giving up property, except for “exempt” property which the law allows you to keep. In most cases, all of your property will be exempt. But property which is not exempt is sold, with the money distributed to creditors. Straight bankruptcy does not require you to pay any of your wages to the Trustee nor to any creditors.
If you want to keep property like a home or a car and are behind on the payments on a mortgage or car loan (secured creditors), a chapter 7 case may not be the right choice for you. That is because chapter 7 bankruptcy does not eliminate the right of mortgage holders or car loan creditors to take your property to cover your debt. But, if you are current on your secured debts, then you will be able to continue paying your secured creditor during and after the bankruptcy in order to keep the collateral.
Chapter 13 (Repayment Plan)
In a repayment plan you file a “plan” showing how you will pay off some of your past-due and current debts over three to five years. The most important thing about a repayment plan case is that it will allow you to keep valuable property--especially your home and car--which might otherwise be lost, so long as you can make the payments which the bankruptcy law requires to be made to your creditors. In most cases, these payments will be at least as much as your regular monthly payments on your mortgage or car loan, with some extra payment to get caught up on the amount you have fallen behind.
You should consider filing a chapter 13 plan if you:
- Own your home and are in danger of losing it because of money problems;
- Are behind on debt payments, but can catch up if given some time;
- Have valuable property which is not exempt, but you can afford to pay creditors from your income over time.
- You will need to have enough income in chapter 13 to pay for your necessities and to keep up with the required payments as they come due
Can Filing a Chapter 7 or 13 Bankruptcy Stop My Foreclosure?
In a word, yes. However, it may not stop it forever. The answer will largely depend on the Chapter of the Bankruptcy Code under which your case is filed. Chapter 7 and Chapter 13 approach the foreclosure differently:
Chapter 7: If you file a straight Chapter 7, or liquidation, the immediate effect of the automatic stay will stop the lender from proceeding with the foreclosure. However, since they are secured creditors, having a mortgage or deed of trust secured by the real estate (your house), they will most likely file a Motion to Lift the Automatic Stay and ultimately get the foreclosure back on track and take the house. The effect of the Chapter 7 filing will, however, grant you a little more time in your home before the Automatic Stay is lifted.
Chapter 13: If you file a Chapter 13, as part of the case you will submit a repayment plan. Commonly, you will be able to add the delinquent mortgage payments to the plan and pay them off over three to five years, depending on the length of your plan. Of course, as part of your plan, you will be required to remain current on the monthly payments, in addition to the back payments you have included in the plan. This can be a tremendous benefit, especially if you have some equity in your property or if your financial problems were caused by a temporary condition, such as a job lay-off, where you are now again gainfully employed. If you have a second or third mortgage on your house, and the value of the house is equal to or less than the amount of the first mortgage, under Chapter 13, you may be able to strip off the second and third mortgages from the property and have them classified as unsecured debt, which then becomes a very low priority for repayment.
Of course, each situation is unique. The state of the current real estate market will play a large role in determining whether or not it ultimately makes sense to try and keep your house.
What Property Can You Keep?
- $60,000 in equity in your house (or $90,000 if you, your spouse or your dependent is at least 60 years of age or disabled);
- $5,000 in equity in your motor vehicles (or $10,000 if you, your spouse or your dependent is at least 60 years of age or disabled);
- Your government-qualified retirement accounts;
- Your social security or unemployment benefits;
- Your Veteran’s benefits, public assistance, and pensions--regardless of the amount.
Your clothing ($1,500), jewelry ($2,000), household goods ($3,000), tools of your trade ($20,000) and other items are also exempt under Colorado law. In determining whether property is exempt, you must keep a few things in mind. The value of property is not the amount you paid for, it is what it is worth now. Especially for furniture and cars, this may be a lot less than what you paid or what it would cost to buy a replacement.