The Law Office of Steve Lopez helps people get rid of personal and business debt and obtain the “fresh start” they desire. If you are in debt and looking for options or solutions, call our office today for a free consultation.
What is Bankruptcy?
Bankruptcy is a federal court process designed to help consumers and businesses eliminate their debts or repay them under the protection of the bankruptcy court. Bankruptcies can generally be described as “liquidations” or “reorganizations”.
Different Chapters of Bankruptcy
Chapter 7 bankruptcy can be filed by individuals (called a “consumer” Chapter 7) or businesses (called a “business” Chapter 7). A chapter 7 bankruptcy typically lasts 4-6 months.
In Chapter 7 Bankruptcy, some of your property may be sold to pay down your debt. In return, most or all of your unsecured debts (that is, debts which collateral has not been pledged) will be erased. You get to keep any property that is classified as exempt under the state of federal laws available to you (such as your clothes, car and household furnishings). Many debtors who file for Chapter 7 bankruptcy are pleased to learn that all of their property is exempt.
If you own money on a secured debt (for example, a car loan for which the car is pledged as a guarantee of payment), you have a choice of allowing the creditor to repossess the property; continuing payments on the property under the contract (if the lender agrees); or paying the creditor a lump sum amount equal to the current replacement value of the property. Secured debts cannot be eliminated with a Chapter 7.
Eligibility for Chapter 7
Not everyone can file for Chapter 7 bankruptcy. For example, if your disposable income is sufficient to fund a Chapter 13 repayment plan — after subtracting certain allowed expenses and monthly payments for certain debts — you won’t be allowed to file for Chapter 7 bankruptcy.
To qualify you must pass the “means test”, a formula designed to keep filers with higher incomes from filing for Chapter 7 bankruptcy. Only bankruptcy filers with primarily consumer debts, not business debts, need to take the means test. High income filers who fail the means test may file Chapter 13 bankruptcy to repay a portion of their debts, but may not file Chapter 7 bankruptcy to wipe out their debts altogether.
However, having to take the Chapter 7 means test doesn’t mean that you must be penniless in order to file Chapter 7 bankruptcy. You can earn significant monthly income and still qualify for Chapter 7 bankruptcy if you have a lot of expenses, such as a high mortgage payment or a car payment.
Chapter 13 bankruptcy is also known as “wage earner” bankruptcy. In order to file for Chapter 13 you must have a reliable source of income that you can use to repay some portion of your debt.
When you file for Chapter 13 bankruptcy, you must propose a repayment plan that details how you are going to pay back your debts over the next three to five years. The minimum amount you’ll have to repay depends on how much you earn, how much you owe, and how much your unsecured creditors would have received if you’d filed for Chapter 7 bankruptcy.
Your debts must be within limits set by the federal government: Currently, you may not have more than $1,149,525 in secured debt and $383,175 in unsecured debt.
If you have secured debts, Chapter 13 gives you an option to make up missed payments to avoid repossession or foreclosure. You can include these past due amounts in your repayment plan and make them up over time.
Chapter 11 is typically used by financially struggling businesses to reorganize their financial affairs. It is also available to individuals but because Chapter 11 bankruptcy is expensive and time-consuming, it is generally used only by those whose debts exceed the Chapter 13 bankruptcy limits (rare) or who own substantial nonexempt assets (such a several pieces of real estate).
Chapter 12 is almost identical to Chapter 13 bankruptcy. But to be eligible for Chapter 12 bankruptcy, at least 80% of your debts must arise from the operation of a family farm. Chapter 12 bankruptcy has higher debt ceilings to accommodate the large debts that may come with operating a farm, and it offers the debtor more power to eliminate certain types of liens. Very few people use Chapter 12 bankruptcy.