Bankruptcy Law Articles

The different types of bankruptcy in the USA are:

Chapter 7 Bankruptcy (Liquidation):

• This is the most common type of bankruptcy for individuals.
• It involves the liquidation of the debtor's non-exempt assets to pay off creditors.
• After the assets are sold, most remaining eligible debts are discharged, allowing the debtor to start fresh.

Chapter 13 Bankruptcy (Reorganization):

• This allows individuals with regular income to create a 3-5 year repayment plan to pay back all or a portion of their debts.
• Debtors get to keep their property and assets while making payments to a trustee who distributes the funds to creditors.

Chapter 11 Bankruptcy (Reorganization):

• This is primarily used by businesses to restructure their debts and operations to become profitable again.
• Individuals can also file under Chapter 11, typically when their debts exceed the limits for Chapter 13.

Chapter 9 Bankruptcy (Adjustment of Debts of a Municipality):

• This is only available to municipalities, such as cities or counties, that are insolvent and want to adjust their debts.
• It does not involve liquidation of assets, but rather a debt adjustment plan.

Chapter 12 Bankruptcy (Family Farmer/Fisherman Reorganization):

• This allows family farmers or fishermen with regular annual income to reorganize their debts.

Chapter 15 Bankruptcy (Cross-Border Insolvency):

• This enables foreign debtors to file for bankruptcy under U.S. laws and coordinate cross-border insolvency proceedings.

The most commonly used types of bankruptcy are Chapters 7 and 13 for individuals, and Chapter 11 for businesses.

Here is the key difference between Chapter 7 and Chapter 13 bankruptcy in the USA:

Chapter 7 vs Chapter 13 Bankruptcy

The main differences are:

Debt Discharge:

• Chapter 7 allows for the complete discharge of eligible unsecured debts, such as credit cards and medical bills.
• Chapter 13 does not fully discharge debts, but rather restructures them into a 3-5 year repayment plan. 

Assets and Property:

• In Chapter 7, the debtor may have to surrender non-exempt assets to pay off creditors.
• In Chapter 13, the debtor can keep their property and assets by making payments to a trustee as part of the repayment plan.

Eligibility:

• Chapter 7 has an income-based means test that limits eligibility to those below the state's median income level.
• Chapter 13 has higher income limits and is available to those who don't qualify for Chapter 7.

Repayment:

• Chapter 7 does not require any repayment plan, with debts being discharged relatively quickly (3-4 months).
• Chapter 13 requires a 3-5 year court-supervised repayment plan to pay back a portion of the debts.

Impact on Credit:

• Both types of bankruptcy remain on credit reports for up to 10 years, but Chapter 7 has a more severe short-term impact.

In summary, Chapter 7 is a faster process that fully discharges eligible debts but may require asset liquidation, while Chapter 13 allows debtors to keep their property by restructuring debts into a multi-year repayment plan. The choice depends on the individual's financial situation and goals.

The key advantages of filing for Chapter 7 bankruptcy in the USA are:

Debt Discharge:

• Chapter 7 can wipe out or discharge most types of unsecured debts, such as credit card debt, medical bills, and personal loans.
• This provides immediate and permanent relief from these debts, allowing the debtor to start fresh.

Automatic Stay:

• Filing for Chapter 7 bankruptcy triggers an automatic stay, which immediately stops all collection efforts by creditors, including lawsuits, wage garnishments, and harassing phone calls.
• This provides quick relief from creditor harassment.

Exemptions and Property Protection:

• Chapter 7 allows debtors to keep most of their essential property, such as a car, household items, and a portion of home equity, through state-defined exemptions.
• This means debtors often do not have to surrender significant assets to pay off creditors.

Credit Rebuilding:

• After the bankruptcy discharge, debtors have the opportunity to start rebuilding their credit, as they are no longer saddled with previous debts.
• This can make it easier to obtain new credit, loans, and credit cards in the future.

Speed and Cost:

• The Chapter 7 bankruptcy process is relatively fast, typically taking 3-4 months from filing to discharge.
• It is also generally less expensive than other bankruptcy chapters, with court filing fees around $335.

In summary, the main advantages of Chapter 7 bankruptcy are the ability to quickly discharge most debts, stop creditor harassment, protect essential assets, and start rebuilding credit. This makes it an attractive option for many individuals struggling with unmanageable debt.

The key disadvantages of filing for Chapter 7 bankruptcy in the USA are:

Impact on Credit:

• A Chapter 7 bankruptcy filing will remain on your credit report for up to 10 years, severely damaging your credit score.
• This makes it much harder to obtain new credit, loans, credit cards, and even housing or employment in the future.

Loss of Property:

• In a Chapter 7 bankruptcy, the bankruptcy trustee can sell any of the debtor's non-exempt assets to pay off creditors.
• This means the debtor may have to surrender valuable property like a home, car, or investments, even if they were making payments.

Ineligibility for Certain Debts:

• Certain types of debts, such as student loans, child support, alimony, and recent tax debts, cannot be discharged in a Chapter 7 bankruptcy.
• Debtors will still be responsible for repaying these non-dischargeable debts after the bankruptcy.

Means Test Requirement:

• To qualify for Chapter 7 bankruptcy, debtors must pass a "means test" to demonstrate their income is below the state's median level or that they have limited disposable income.
• Those who fail the means test may only be eligible for a Chapter 13 bankruptcy instead.

Limitations on Repeat Filings:

• Debtors can only file for Chapter 7 bankruptcy once every 8 years, limiting their ability to use it repeatedly.
• This means they may have to wait a long time before being eligible to file again if their financial situation deteriorates.

In summary, the main disadvantages of Chapter 7 bankruptcy are the long-term damage to credit, potential loss of property, ineligibility for certain debts, means test requirements, and limitations on repeat filings. These factors make it important for debtors to carefully consider whether Chapter 7 is the best option for their situation.

Here is a summary of how long it typically takes to recover from a Chapter 7 bankruptcy in the USA:

Recovery Time After Chapter 7 Bankruptcy

Credit Report Impact:

• A Chapter 7 bankruptcy will remain on your credit report for up to 10 years.
• This long-term impact on your credit score is one of the major downsides of filing Chapter 7 bankruptcy.

Credit Score Recovery:

• Research shows credit scores typically plummet in the 18 months leading up to a Chapter 7 filing, but then start to steadily improve afterwards.
• Within 6 months of filing, the average credit score for a Chapter 7 filer rose from 538.2 to 620.3.
• With responsible credit behavior after bankruptcy, it's possible to rebuild credit and get approved for new credit cards, loans, and mortgages within 1-2 years.

Eligibility for New Credit:

• After a Chapter 7 discharge, you must wait 2 years before you can qualify for a mortgage, and 1 year before you can refinance your home.
• For other types of credit like credit cards, you may be able to obtain new accounts within 6-12 months after the bankruptcy is discharged.

Overall Financial Recovery:

• The total time it takes to fully recover financially from a Chapter 7 bankruptcy can vary, but is generally estimated to be 4-7 years.
• This allows time to rebuild credit, save up emergency funds, and establish a strong financial foundation again.

In summary, while a Chapter 7 bankruptcy has a long-term impact on your credit report, most filers are able to start rebuilding their credit and finances within 1-2 years after the bankruptcy is discharged, with a full financial recovery typically taking 4-7 years. The key is practicing responsible credit habits going forward.

Here are the key consequences of filing for Chapter 7 bankruptcy on your credit score:

Significant Initial Drop in Credit Score:

• Filing for Chapter 7 bankruptcy will cause a dramatic drop in your credit score, potentially between 200-240 points for someone with a good credit score of 780 or above.
• For someone with a more average credit score of 680, the drop may be 130-150 points.
• The impact is more severe for those with higher credit scores prior to the bankruptcy.

Long-Term Damage to Credit Score:

• A Chapter 7 bankruptcy will remain on your credit report for up to 10 years from the filing date.
• During this 10-year period, the bankruptcy will continue to negatively impact your credit score, though the effect lessens over time.

Difficulty Obtaining New Credit:

• With a bankruptcy on your credit report, you will likely have a very hard time qualifying for new loans, credit cards, mortgages, and other forms of credit, at least in the first 1-2 years after the bankruptcy.
• Any credit you are able to obtain will likely come with very high interest rates and unfavorable terms.

Potential Variation Based on Prior Credit Profile:

• If your credit was already poor before the bankruptcy, the drop in your credit score may be more modest compared to someone with previously good credit.
• However, the long-term damage to your credit report and ability to obtain new credit will still be significant.

In summary, filing for Chapter 7 bankruptcy has severe and long-lasting consequences for your credit score, causing an immediate and dramatic drop that can take years to recover from, as well as making it very difficult to obtain new credit on favorable terms. The impact is especially severe for those with previously good credit.

The key advantages of filing for Chapter 13 bankruptcy in the USA are:

Ability to Repay Debts Over a Longer Period:

• Chapter 13 allows you to restructure your debts into a 3-5 year repayment plan, giving you more time to catch up on payments.
• This can help if you are behind on bills but have a steady income to make the repayment plan work.

Potential to Reduce Debt Amounts:

• In many Chapter 13 cases, you may only be required to pay back a portion of your unsecured debts, such as 1% of the total owed.
• This can significantly reduce the overall amount you have to repay compared to the original debt.

Stopping Foreclosure and Repossession:

• Filing Chapter 13 triggers an automatic stay that stops foreclosure proceedings and repossession of assets like cars.
• This buys you time to catch up on missed payments and keep your home or vehicle.

Flexibility to Keep Assets:

• Chapter 13 allows you to keep important assets like your home and car by incorporating the payments into your repayment plan. 
• This is in contrast to Chapter 7, where non-exempt assets may need to be sold.

Ability to Rebuild Credit Sooner:

• While a Chapter 13 bankruptcy stays on your credit report for 7 years, it may allow you to start rebuilding credit sooner than a Chapter 7.
• This is because you are making regular payments through the repayment plan.

In summary, the main advantages of Chapter 13 bankruptcy are the ability to restructure debts over a longer period, potentially reduce debt amounts, stop foreclosure and repossession, keep important assets, and potentially rebuild credit faster than a Chapter 7 filing.

The key eligibility requirements for filing for Chapter 13 bankruptcy in the USA are:

Regular Income:

• You must have a regular source of income, such as wages, salary, self-employment income, Social Security, pension payments, etc.
• This is because Chapter 13 involves setting up a 3-5 year repayment plan to pay back a portion of your debts.

Debt Limits:

• Your unsecured debts cannot exceed $419,275, and your secured debts cannot exceed $1,257,850.
• Debts are considered "secured" if you have collateral like a home or car that the creditor can take if you don't pay.

Tax Filing Compliance:

• You must be current on filing your federal and state income tax returns for the 4 years prior to your bankruptcy filing.
• If you are not current, the court may postpone the proceedings, but you will eventually need to provide the required tax documents.

No Recent Bankruptcy Filings:

• You cannot have filed for Chapter 13 bankruptcy in the past 2 years or Chapter 7 bankruptcy in the past 4 years.
• You also cannot have had a previous bankruptcy case dismissed in the past 180 days for certain reasons like failing to appear in court.

Sufficient Disposable Income:

• You must demonstrate to the court that you have enough disposable income, after accounting for allowable expenses and secured debt payments, to fund the Chapter 13 repayment plan.
• The plan must pay back certain priority and secured debts in full.

In summary, the key requirements are having a regular income, not exceeding the debt limits, being current on tax filings, not having recent bankruptcy filings, and proving you have sufficient disposable income to make the Chapter 13 repayment plan work.