What is Chapter 7 vs. Chapter 13 Bankruptcy?

Chapter 7 Bankruptcy, sometimes called a fresh start, is a liquidation proceeding for both individuals or businesses hopelessly mired in debt and possibly facing foreclosure. All non-exempt property of the debtor is turned over to the bankruptcy trustee. If there are substantial assets the trustee converts those to cash and distributes it to the debtor's creditors. The debtor receives a discharge of all dischargable debts in approximately 4 to 6 months. In most cases filed the debtor has no assets and the proceeding is a fairly straightforward and quick process.

Chapter 13 Bankruptcy is known as a reorganization bankruptcy. It is filed by individuals desiring to pay off their debts in a time frame of up to 5 years. If a debtor has non-exempt property that they wish to keep and a predictable income, this is an option. The income must be sufficient to have an amount left over to pay their debts after taking into consideration reasonable expenses.

Chapter 11 Bankruptcy -- An individual may file under chapter 11; however, the provisions of chapter 11 are generally used to reorganize a business. Chapter 11 allows the debtor to continue its business operations by means of a plan of reorganization, which must meet certain statutory criteria. 11 U.S.C. §1129. By enacting chapter 11, Congress gave the debtor a chance to restructure its finances so that it may continue to operate, provide its employees with jobs, pay its creditors, and produce a return for its stockholders. Because chapter 11 envisions an ongoing business, the most likely persons to have knowledge of the operation and details of the business are the existing managers who normally continue operations during the chapter 11 process. A major rationale business reorganizations is that the value of a business as an ongoing concern is greater than it would be if its assets were sold. When a business develops financial difficulties, such as not being able to pay its creditors due to cash flow problems, it may consider filing a chapter 11 bankruptcy. If the business can extend or reduce its debts or drastically lower its operating cost, it often can be returned to a viable state. Generally, it is more economically efficient to reorganize than to liquidate, because doing so preserves jobs and assets. Cooperation among the various interests is crucial to a successful reorganization.

Will Creditors Stop Their Harrassment Tactics?

Absolutely! As mandated by law, all actions against a debtor must stop once the bankruptcy documents are filed. An automatic stay occurs even if your home is in foreclosure which gives the debtor much needed short term relief. While secured creditors like banks and finance companies holding liens on vehicles may be able to get the stay lifted if you cannot make the payments, creditors cannot bring new lawsuits, continue current lawsuits, or continue wage garnishments. No creditors can make telephone calls or contact demanding payments once the papers have been filed.

Credit Bureaus and obtaining new credit.

All bankruptcy filings are public record. Credit bureaus will note your bankruptcy and it will remain for 10 years on your credit record. However, your life is not ruined! Many banks and financial institutions offer 'secured' credit cards where the size of your credit line is determined by the amount of money you leave on deposit with the institution. This deposit is used to guarantee payment. The interest rate is typically high but as you prove your ability to pay the interest rate may come down and the credit line increased. Two years after filing bankruptcy, debtors are eligible to get mortage loans with rates and terms on par with those who have not filed bankruptcy and fit the same profile. You are probably a much better credit risk after filing bankruptcy since you cannot file again for 8 years.

Can I keep my credit lines and credit cards?

Possibly, but probably not. However, it is up to the credit card company. If you are discharging their credit card, unless you reaffirm the debt, they will cancel your card. Even if you have a zero balance. Hope is not lost, however, as 'secured' cards are available as discussed in the section above.

What about filing bankruptcy and keeping my job?

All Employers are prohibited from discriminating against employees because they filed bankruptcy. This is under U.S.C. Sec. 525 of the bankruptcy code..

Are Credit Counselors Useful?

Possibly. However, be cautious and careful if you are contemplating using a credit counselor or agency. There are many unscrupulous people in this field and the IRS has taken actions against some "not for profit" groups due to much abuse in the industry. It will probably end up costing less money if you file Chapter 7 or 13 instead of using a credit counselor. You will also probably be able to rebuild your credit rating much faster.

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