What type of bankruptcy is right for me?

Chapter 7 and 13

There are many "chapters" of the U.S. Bankruptcy Code.  The 2 chapters used by most of us to reduce the burden of debt and to put creditors under control are Chapters 7 and 13.

Chapters 11, 12, and 15

Just to be clear, there are also other chapters. First, Chapter 11 should come to mind when you think of large companies filing for bankruptcy.  General Motors (“GM”) was an example of this about a decade ago.  A business is trying to continue existing, but ends up not paying some creditors or adjusting existing debts.  The company ends up leaner in an attempt to continue doing business.  Second, Chapter 12 is for family farmers and fishermen.  Lastly, Chapter 15 is for municipalities.  For example, some cities have filed under Chapter 15.

Candor

A lot of the following is good news.  I want to show it because the good news doesn’t get enough attention.  When a negative item needs to be discussed, then I shall do so in a sincere and candid way.  I do better when I have all the information and that policy is the most respectful dealing with others.

Spring cleaning using Chapter 7

Chapter 7 may sometimes be referred to as, “Straight bankruptcy” or “Liquidation” and is what most people think of when they hear the term, “Bankruptcy.”  I like Chapter 7.  It is straightforward and completes fairly quickly, generally about 90 days from the date of filing.  A greatly simplified explanation of the results is that your debts get divided into piles.  Imagine something similar to what you might do during spring cleaning, you have a “trash” pile and a “keep” pile.  

Keep pile and trash pile

The "keep" pile of debts is generally things people wish to keep, such as a house or car.  Keep pile debts that people wish they could get rid of but likely have to pay after the case include recent taxes and of course, student loans. The trash pile may be credit cards, personal loans, payday loans, medical bills, deficiencies from repossessions and foreclosures, some older taxes, and then things you may or may not put there like vehicles or a house you want to surrender.

Spring cleaning PLUS long term repairs using Chapter 13

Chapter 13 does most of what Chapter 7 does, but it also offers you the chance to catch up on important debts like vehicle and house loans so that you don't lose these items. Unlike "it is due now or else", Chapter 13 lets you catch up delinquent payments over a period of up to 5 years, allowing you to get by a tough time without losing your most important things. As such, it allows you, in a sense, to repair the damage but in a way you can afford and over a long period of time.  And, the best part...it can take the pressure off. 

It also allows you to get the work done, mostly without having to pay for it in advance. Unlike Chapter 7, where attorneys have to get all their money up-front, many, if not most Chapter 13 clients can get the work done now and pay for it later, like getting billed for the spring cleaning after the work is done. That's what our $0 Money Down program is all about.

Burdens lessened

Sometimes the pile is just too big. For example, keeping a vehicle you really don't need or really can't afford.  In bankruptcy, you can "surrender" the vehicle and get rid of the debt.  Why might you want to surrender a vehicle?  Maybe your situation has changed and you cannot afford it anymore so you need to get freed up and finance something with a lower monthly payment or buy something with no payment.  This can be a great relief, like a weight being lifted from your shoulders.  Also, maybe the vehicle had a catastrophic breakdown (transmission, blown head gasket).  Homes can have even bigger problems.  I can count on two hands the number of hurricanes and tornadoes I remember in this State.  The interest rate can change, balloon payments, higher taxes and insurance.  Those big ticket items can quickly consume your world with stress if they are sinking your budget for all of the other things your family needs and there are less expensive options.

Armor and shield

Both Chapter 7 and 13 have, “Exemptions” and this should be one of your new favorite words.  These exemptions vary State-by-State, even though bankruptcy is mostly Federal law.  Well, exemptions are all the things you get to keep.  For North Carolina they include $35,000 of equity in your residence and $3,500 of equity in a vehicle.  Even though the vehicle one is much smaller, vehicles tend to depreciate a lot the first couple of years and then more gradually over the next decade.  So, even as you pay down a vehicle it is worth less if you were to sell it during those years.  $5,000+ in household goods, $2,000 in tools of trade if you own things you need to work, and up to $5,000 in a wildcard exemption for property that doesn’t fit into other categories.  Money in bank accounts is a good example.

Never

The best part...during the 90 days  or so, the creditors cannot call, write, or make any attempts to collect without first getting specific permission for good cause from the Judge.  If your phone rings way too much with these calls then then quiet will be most welcome.  The reason they cannot collect is a restraining order of sorts called the “Stay.”  At the end of the case, for debts in the trash pile, the restraining order becomes permanent (discharge injunction).  The creditor needs to update their records and put a “$0” as the balance.  Clients have often asked, “Well, when do I pay these back?”  I take great joy in smiling and saying, “Never.”