Federal bankruptcy law helps individuals get a handle on their debt by allowing them to request a complete liquidation under Chapter 7 of the Bankruptcy Code and/or a repayment plan under Chapter 13 or Chapter 11.
Bankruptcy under Chapter 7 of the Bankruptcy Code is often referred to as “liquidation bankruptcy” or a "straight bankruptcy.” Under Chapter 7, a Bankruptcy Court can relieve a debtor of the responsibility to pay most of his or her debts but still allow the debtor to keep much of his or her property.
A debtor begins the bankruptcy process by filing a petition with his local bankruptcy court. Once the petition is filed, an “automatic stay” goes into effect and the creditors are prohibited from making any attempt to collect their debt, including attempting foreclosure and repossession. Along with the petition, or shortly thereafter, the debtor files various written “schedules” and “statements” to inform the Court of his outstanding debts, his current income and expenses, any existing contracts, any current or potential lawsuits, and any recent asset transfers. Upon receipt of the Petition, the Court appoints a Bankruptcy Trustee to handle the debtor’s case. The Trustee determines what assets, if any, it can collect from the debtor to sell to pay off the creditors. The Trustee can only collect certain assets, known as “non-exempt” assets, from the debtor. The debtor can keep his “exempt” assets if he chooses (and wants to continue to pay for as debts on those assets are not discharged). Texas law generally exempts a debtor’s home, furniture, furnishings, motor vehicles, and additional personal property up to a certain dollar amount. Most debtors only have “exempt” property. Once the Trustee sells the debtor’s “non-exempt” property, if any, and distributes the proceeds to the creditors, the Bankruptcy Court discharges the debtor’s remaining debt (other than alimony and child support, student loans, most tax obligations, and debts resulting from fraudulent or malicious acts) and concludes the bankruptcy proceeding.
Bankruptcy under Chapter 13 of the Bankruptcy Code is sometimes referred to as a “wage earner plan.” Under Chapter 13, a Bankruptcy Court can help a debtor reorganize his debts and pay them off over time. Under Chapter 13, a debtor typically keeps all of his or her property.
A debtor begins a Chapter 13 bankruptcy by filing a petition with his local bankruptcy court. Once the petition is filed, an “automatic stay” goes into effect and the creditors are prohibited from making any attempt to collect their debt, including attempting foreclosure and repossession. Along with the petition, or shortly thereafter, the debtor files various written “schedules” and “statements” to inform the Court of his outstanding debts, his current income and expenses, any existing contracts, any current or potential lawsuits, and any recent asset transfers. Within approximately 15 days of filing the petition, the debtor submits a plan to the Court detailing how he will pay off his debts. Under the plan, the debtor must completely pay off certain “priority” debts, such as the costs of administering the bankruptcy, employees’ wages and benefits, debts for undelivered services or goods, and taxes, and pay for any encumbered property he wants to keep. The debtor can plan, based on his ability, to partially pay any remaining debt and ask the Court to discharge the rest. Once the Court approves a payment plan for the debtor, a Court-appointed Trustee begins collecting the debtor’s paychecks and administering the plan. Upon the debtor’s successful completion of the repayment plan, the Bankruptcy Court discharges any remaining debt and concludes the bankruptcy.
In some situations, an individual may be able to use both Chapter 7 and Chapter 13 to handle his or her debt.
Chapter 11 is rarely used by individuals. It is only used by individuals who wish to reorganize debt which exceeds the limits for filing bankruptcy under Chapter 13. See Bankruptcy for Businesses for more information on Chapter 11.
If you are in danger of losing your house, your car, or other property, and/or are tired of creditors’ harassment, contact us today. We can help you decide if bankruptcy is for you. The only thing you have to lose is your debt. 1-800-436-9056.