In every bankruptcy consultation, law firm gives, they are asked to evaluate whether a bankruptcy is appropriate based on the client’s particular circumstances. And if so, which type of bankruptcy should be filed. Bankruptcy Law is filled with legalese which may not be too clear to a non-attorney. Words such as trustee, liquidation, contest, exempt and even discharge have legal meanings beyond the lay-person meaning.
In plain English, a bankruptcy should be considered anytime when an individual is unable to meet his or her financial obligations. In plain English, a Chapter 7 is appropriate when an individual wants to eliminate all debt (complete liquidation of debt) which can be discharged so long as the client does not want to keep any assets which are not protected by law (Exempt assets).
In plain English, a Chapter 13 is when an individual wants to keep some personal assets. To keep some personal assets, an individual appointed by the court (a trustee) discusses with the client or client’s attorney a plan of some debt repayment. The plan typically involves a monthly payment based on the client’s income and necessary expenses. The plan is usually up to five years in duration and may be modified based on changes in the financial circumstances of the client. At the conclusion of the plan term, and so long as the plan obligations have been met, then a discharge of the remaining debt occurs.
The assets which are protected by law are based on State Law. The typical assets which are covered are the home client owns and lives on. Basic clothes, basic furnishings, IRAs, Some types of annuities, and social security benefits are often protected as well.
The debt which typically cannot be discharged includes student loans, IRS debt, and certain liens which attach to property.
The pros and cons of a Chapter 7 versus a Chapter 13 are as follows:
Chapter 7 pros: Gets rid of all debt which is permitted by law to be discharged and permits individuals to get a fresh start. Immediately after the conclusion (discharge) of the bankruptcy, the individual can once again start building his or her credit score. Additionally, a Chapter 7 bankruptcy is fast as it can typically be concluded in about three months or so.
Chapter 7 cons: Only available when assets are either protected by law, or not worth enough for the client to try to protect. Additionally, the fact that a bankruptcy was filed, remains in the credit record for up to 7 years. Additionally, a Chapter 7 bankruptcy can only be done every 8 years from the date of the discharge.
Chapter 13 pros: Lets you keep assets. Reduces your debt repayment to a monthly amount which is usually sustainable based on the individual’s income and necessary expenses.
Chapter 13 cons: Takes a long time. A Chapter 13 bankruptcy may take years to receive a discharge as the plan term can be up to five years. Also in a Chapter 13, the client must make monthly payments based on ability to pay. A Chapter 13 also costs more in terms of attorney fees. This is because a Chapter 13 typically involves a lot more work due to setting up the plan, reviewing what is typically more complex financial situations, and overseeing certain aspects of the plan for many years.
In any event, you should consult with an experienced lawyer such as the Bankruptcy Lawyer Melbourne FL locals trust in order to discuss your particular facts and to apply your particulars with the current state of the law, including the law of the State where you reside. Most bankruptcy attorneys give a free or reduced fee to discuss the particulars of your financial predicament and applicability to bankruptcy law.
Disclaimer: Every case and situation is different. This article is not intended to replace or substitute legal advice. This blog is only intended to explain in plain English what is generally entailed in a bankruptcy and explains some of the basic esoteric wordage that may be used in a Bankruptcy Consult.
Thanks to Authors at Arcadier & Associates for their insight into Bankruptcy Law.