Introduction to Individual Bankruptcy

Individuals typically file bankruptcy under Chapter 7 or Chapter 13 of the Bankruptcy Code, although in some circumstances, an individual may file under Chapter 11. This article only discusses Chapter 7 and Chapter 13, since they are by far the most common.

 

The automatic stay

Collection calls and ongoing collection litigation are required to stop after a bankruptcy is filed. This is called the "automatic stay" of proceedings. The automatic stay provides you and your family with some immediate relief from the fear and anxiety associated with being in debt.

 

Chapter 7
 

Chapter 7 is for debtors needing a "fresh start" due to circumstances such as unemployment, medical bills, business failure, or divorce. Chapter 7 bankruptcy is the preferred choice for most individual debtors in the Upper Peninsula.

Eligibility for Chapter 7 bankruptcy most depends on the debtor's income and expense levels. Most debtors I have seen in my practice are eligible to file Chapter 7; however, there is a waiting period for filing Chapter 7 if a debtor has previously filed bankruptcy. 

The vast majority of Chapter 7 cases are completed in a few months with the debtor retaining all of the property he or she had prior to filing bankruptcy.

A successful Chapter 7 debtor receives a "discharge" (elimination) of debts when all requirements have been satisfied. Dischargeable debts, such as most medical debt and most credit card debt, are no longer owed after the court enters a discharge order. Discharge of debts is the principal goal of Chapter 7 bankruptcy.

Not all debts are dischargeable. Alimony and child support are examples of debts which are not dischargeable. Student loan debt is very difficult to discharge in bankruptcy, although administrative discharges may be available if a borrower has become disabled. Income taxes are only dischargeable in bankruptcy under limited circumstances. There are also some special categories of debts - such as those arising from fraud - which cannot be discharged.

If a Debtor retains a home subject to a mortgage, and the Debtor wishes to keep the home, he or she will need to keep paying on the mortgage in order to do so. Keeping a motor vehicle may also require that payments on the loan be continued on the original contract terms.

Chapter 13

Chapter 13 requires a debtor to live on a restricted budget and to make monthly payments to a trustee for 3-5 years.

Some debtors should consider filing Chapter 13 bankruptcy even if they are eligible for Chapter 7. Reasons for a debtor to file Chapter 13 instead of Chapter 7 include, but are not limited to, the following: the debtor wants to avoid foreclosure by bringing a past-due mortgage up to date; the debtor wants to eliminate a second mortgage on his or her home; the debtor wants to protect a co-signer on a loan; the debtor wants to modify the payment terms on a vehicle; the debtor has more property than he or she would be allowed to keep in a Chapter 7, or the debtor has a type of debt which can only be discharged through Chapter 13 and not through Chapter 7.

Because of the requirement to make payments to a trustee for 3-5 years, Chapter 13 is generally only feasible for debtors with regular income in excess of what is needed to maintain a basic standard of living. Chapter 13 cases are often dismissed or converted to Chapter 7 due to inability to make plan payments.

Successful Chapter 13 debtors receive a discharge of debts, but only if they complete the required Chapter 13 payments and satisfy other post-filing requirements. As with Chapter 7, not all debts are dischargeable in Chapter 13, although a few more categories of debt are dischargeable in Chapter 13 than Chapter 7.

More detailed general information about bankruptcy is given in these Notices and in this Bankruptcy Basics publication.