Q: What is the difference between a Chapter 7 and a Chapter 13 bankruptcy?

A: Chapter 7, known as a liquidation bankruptcy, is a federal court procedure by which a trustee takes over the assets of the debtor’s estate, reduces them to cash and makes distribution to creditors, subject to the debtor’s right to retain certain property. There is usually little or no non-exempt property in most Chapter 7 cases, therefore, there may not be any actual liquidation of the debtor’s assets. These cases are called no-asset cases and the debtor gets the benefit of discharged debt without having to be liquidated.

Chapter 13 bankruptcy is designed for an individual debtor who has a regular source of income. Candidates for Chapter 13 are those who do not qualify for a Chapter 7 because their income is too high or they have too many assets, or both. Although a person may qualify for a Chapter 7 bankruptcy, they may opt to use a Chapter 13 because of the lien stripping abilities that the Chapter 13 can provide. This is a mechanism in which second mortgages can be removed. In a Chapter 13 bankruptcy, the debtor proposes a plan to repay the creditors over time, usually 3-5 years.

Q: What is a discharge?

A: A bankruptcy discharge releases the debtor from personal liability for certain specified types of debt. The discharge is a permanent order prohibiting the creditors of the debtor from taking any form of collection on discharged debts, including legal action and communications with the debtor, such as phone calls and letters.

Q: Can I keep my house if I file bankruptcy?

A: A home or any type of real property is an asset and whether or not the debtor is entitled to retain the asset will depend on whether or not it can be exempted. Exemptions can be either under a Homestead exemption or a wild card exemption. In some cases, the asset need not be exempt because it does not have any value. This is a more frequent occurrence given the economic downturn and the mortgage crisis in which debtors owe more on their home than it is worth. The mortgage on a home is a secured debt and the debtor may opt to retain the home so long as he continues to pay the mortgage obligation.

Q: Will bankruptcy affect my credit?

A: Yes. The fact that you have filed a bankruptcy will appear on your credit record for 10 years. For many people facing bankruptcy, however, they are most likely already behind on their bills and their credit may already be bad. Bankruptcy will probably not make things any worse than having all the past due accounts reported prior to filing bankruptcy. Since bankruptcy wipes out old debts, the debtor is likely to be in a better position to pay his or her current bills and may be able to get new credit. The best way to restore your credit is to obtain new credit and make the payments on a new debt on time.

Q: What is the effect of my bankruptcy on any persons who may have co-signed on a loan for me?

A: If someone has co-signed a loan for you and you file for bankruptcy, the co-signer will still have to pay the debt. You should list the co-signer as a creditor in your bankruptcy petition since they have a contingent claim against you. Their credit may also be affected when you file because the loan itself will reflect that it is in bankruptcy. The co-signer should send a letter to the bank advising that it is not them that are in bankruptcy to clear up their credit issues.

Q: How do I know if I qualify for a Chapter 7 bankruptcy or whether I am a candidate for a Chapter 13?

A: These questions are best answered after one of our attorneys has an opportunity to evaluate your income, the size of your family and your financial situation. Give us a call for a free 30-minute consultation and our attorneys will be able to tell you whether you qualify for a Chapter 7 or are a candidate for Chapter 13 and your options for each.