Chapter 13 reorganization is designed to help you pay off some of your debts in the next 3 to 5 years instead of simply doing away with your debt completely. The plus side to Chapter 13 is that you don’t have to forfeit any of your assets, so you may wish to consider this option if your primary goal is to catch up on your mortgage payments.
Understanding Chapter 7 liquidation
Chapter 7 is what most people think when they hear the term bankruptcy, and some people prefer to call this “straight bankruptcy.” Under this option, you don’t have to worry about establishing a repayment plan, because if your petition is successful your debts will be completely and permanently eliminated.
What about the requirement that you forfeit some of your assets? Well, technically speaking, you may be required to liquidate some of your assets in order to pay off your creditors as much as possible. However, that is only a theory. What we mean to say is that practically speaking, about 96% of Chapter 7 bankruptcies involve consumers with no real assets. In other words, most people do not own anything at all (or at least anything worth considering) in order to pay off their creditors.
The great news is that once your filing is successful, you don’t have to worry about your debts ever again, unless you wish to pay off creditors voluntarily. What happens if you suddenly improve your financial situation? You still don’t owe anything to your creditors in most cases, though there are some exceptions. For example, you may have to forfeit some of the following items if you receive them within 180 days of declaring bankruptcy: income tax refunds for pre-bankruptcy years, divorce property awards, life insurance payments, and inheritances.
For the most part, however, you are free and clear after you successfully file your case. For example, you could win the lottery and keep all the winnings without having to pay back creditors (though your conscience may dictate otherwise). Of course, you should be careful not to spend all of your money on lottery tickets when you should be getting your finances back on track.
What about the new bankruptcy law changes?
Many people mistakenly assume that bankruptcy is no longer an option because of the changes made in the bankruptcy law in the year 2005. (In case you’re wondering, the official name of this law is the Bankruptcy Abuse Prevention And Consumer Protection Act of 2005.) The truth is that the process has become more complicated and tedious (much to the disgust of many bankruptcy lawyers), but most people who would have qualified previously will still qualify under the new bankruptcy statues.
The biggest change is something called the means test, which is simply a complicated way of determining whether you really need bankruptcy based on your income and expenses. If your income is unusually low (below the median income for your state), then you won’t even have to worry about these formalities. Otherwise, you’ll have to go through the means test and carefully document all of your income and expenses. It is a bit of a pain, but it is unlikely to keep you from qualifying if you truly are overwhelmed by your debts.