Other than consumer perceptions that bankruptcy is somehow unethical or “wrong”, the primary issue with filing bankruptcy is that it remains on the debtor’s credit for up to seven (Chapter 17) or ten years (Chapter 13) from filing and may interfere with efforts to obtain credit, purchase or refinance a home or even obtain employment. However, it should be noted that most who seek this relief already have impaired credit and, more importantly, in reality new credit is generally extended to debtors who keep their payments current for a year or two following discharge. So, in effect bankruptcy can work to “repair” credit.
The United States Bankruptcy Code offers two primary paths for consumers: Chapter 7 and Chapter 13. Chapter 11, on the other hand, is primarily for businesses. Here's some more information on each type:
Chapter 7 Bankruptcy
In a so called “straight” bankruptcy, the Trustee in bankruptcy seeks to liquidate the debtor’s non exempt property and distribute the proceeds to the creditors in order of priority, in exchange for discharge of all eligible debt. (Exemptions for various property classifications are set out in federal and state law.) However, certain debts such as guaranteed student loans and domestic support obligations are non-dischargeable in bankruptcy. Most 7’s are “no asset” bankruptcies.
Certain higher income debtors who do not meet the new Means Test must instead file a Chapter 13 Bankruptcy.
Chapter 13 “Debtor in Possession” Bankruptcy
Here, unlike in Chapter 7 proceedings, the debtor retains possession of the assets (hence its nickname). In order to be confirmed by the court, the debtor must prove sufficient income to support a 3-5 year plan wherein payments on secured debt such as mortgages and auto loans (including arrears) and non-dischargeable items continue and unsecured creditors typically get paid a small portion of their debts. For debtors facing mortgage foreclosure, Chapter 13 may be the only choice to halt the process while seeking other remedies within or outside of bankruptcy. However, recent statistics indicate that only about 35% of all 13 plans are ever completed.
There are overall limits as to how much unsecured and/or secured debt a debtor may have and still utilize Chapter 7 or 13.
Chapter 11 Bankruptcy for Businesses
Chapter 11 is primarily used to help in debt businesses restructure. An example is the bankruptcy from which GM has recently successfully emerged. It is much more complex, time consuming and expensive than Chapter 7 or 13, but is the sole resort for individual debtors with debt which exceeds the limits mentioned above.
In summary, the automatic stay provides an effective if temporary refuge from foreclosure and other debt collection activities and many debtors ultimately do obtain the permanent solution to their debt problems: the “fresh start” which is the ultimate objective of the US bankruptcy laws.
Christopher C. Carr, Esq., MBA (Finance) is a suburban Philadelphia, Pennsylvania solo consumer bankruptcy attorney. He has been in practice for over 25 years in Real Estate & Mortgage Modifications; Debtor & Foreclosure Defense; Small Business, including Business Divorces; Elder Law; Technology, including Computer Law & E-Commerce & Entertainment Law. His background also includes significant experience as a financial planning analyst with a Fortune 100 Company.