Bankruptcy’s Role in Resolving Debt

For people deeply in debt and at the end of their financial rope, filing for personal bankruptcy protection may be the last remaining course of action. However, making such an important decision should not be done lightly, particularly as the financial ramifications of a filing will likely last for years to come. With that said, let’s take a look at the two most common forms of bankruptcy, and the particulars of each.

Chapter 13
Chapter 13 provides an opportunity to re-structure secured debt. This form of protection does not eliminate the debt, but rather allows the court to work with debtors, such as mortgage or auto lien holders to provide a systematic, manageable repayment plan for these debts. Each settlement is different, but the re-payment plans are often 3-5 years to provide financially strapped families the chance to get back on sound, fiscal footing.

During this time, securing any additional credit such as buying a new car or taking on a new credit card will be difficult, if not impossible. The exceptions to this are the high interest, somewhat dubious debt associated with payday loans and the “we’ll lend money to anyone” lenders that are best avoided, regardless of your financial situation.

Specifics of Chapter 13

• As a rule, Chapter 13 is for secured debt only such as homes, cars and appliances.
• Chapter 13 entails re-structuring payments, not forgiving the debt.
• Repayment plans of 3-5 years are the norm.
• Requires a consistent source of household income to successfully file.
• Involves monthly payments to a court-appointed trustee, who then disburses them  in the appropriate amounts, to the appropriate creditors.

Chapter 7
Chapter 7 excuses, or discharges unsecured debt like credit cards, lines of credit not attached to collateral, and payday loans. What this means to individuals and families is debts included in a successful filing are no longer borne by them; they are expunged. However, some debts are excluded from this possibility, and debtors have the right to argue their case for not being included in the discharge. If this occurs, it is at the hearing all Bankruptcy petitioners are required to attend, usually with their attorneys.

Specifics of Chapter 7

• Chapter 7 protection does not include re-payment schedules
• Expunges outstanding, unsecured debt included in Bankruptcy filing entirely.
• Debts such as alimony or child support, student loans or back taxes (State of Federal) are excluded from Chapter 7 Bankruptcy protection.
• Requires passing a “means test” (described in more detail below) ensuring there is not adequate household income to qualify for Chapter 13 Bankruptcy.

Summary
The biggest impact to individuals considering bankruptcy protection occurred when the Bankruptcy Code was amended in 2005. Among other things, the changes made qualifying for Chapter 7 protection, and the subsequent discharging of qualifying debt, more difficult. As of ’05, qualifying for Chapter 7 requires passing a “means test.” This test is essentially a calculation determining if an individual or household income is adequate to pay the debt, if it were restructured as in a Chapter 13 filing, as opposed to discharged as in a Chapter 7.

Even prior to amendments to the Bankruptcy Code, and certainly since, enlisting the assistance of a qualified, experienced Bankruptcy attorney is vital before proceeding. They can be instrumental in determining which option is best suited to your situation, and which you qualify for, as well assist in navigating the sometimes confusing maze of judicial red tape.