For individuals facing an intolerable debt load and thinking about filing for bankruptcy, they have two options to consider. The first is chapter 7 bankruptcy protection and the second is chapter 13. Chapters 7 and 13 refer to actual chapters in a particular title of the United States Code appropriately entitled "Bankruptcy". Chapter 7 bankruptcy protection is the quick and dirty bankruptcy method. The debtor files a petition with the bankruptcy court, and the court trustee oversees the liquidation of non-exempt assets and the discharge of all the debtor's remaining obligations.
Chapter 13 is sometimes more favorable when compared to chapter 7 because chapter 7 does not have the power to halt actions such as foreclosure, while chapter 13 does. Under chapter 13, the debtor comes up with a debt repayment plan and presents it before the bankruptcy court, which then orders the creditors to accept the plan. Thanks to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, it is now much more difficult for debtors to file for chapter 7.
Years of complaints from lenders about lost profits due to bankruptcy prompted Congress to reform the bankruptcy law in 2005. BAPCPA, as the new law become known, stipulated that all chapter 7 cases that did not meet certain criteria would be converted into chapter 13 cases. Therefore, many debtors were barred from filing for chapter 7 and they did not meet the income requirements of chapter 13. The end result was a wave of defaults and foreclosures as homeowners could not meet the demands of both their mortgage debt and other debt, like credit card debt.
BAPCPA fundamentally altered the rules of the game when it came to bankruptcy. The good news is that it did not alter the basic procedure for chapter 13. Under chapter 13, the debtor files a repayment plan with the court that lasts from three to five years. In this document, all of their expected transaction amounts to their lenders are clearly outlined and itemized. In addition, the debtor must file documents or schedules of their personal income and expenditures, a list of all of their property both real and personal, and a detailed list of their monthly expenses that itemize everything that they spend their money to use, buy or get every month.
These documents allow the court to certify that the debtor is in fact facing a dire situation. Bankruptcy fraud is a federal offense, punishable by a fine and up to five years in prison. In fact, if the debtor later tries to reassert ownership of an unscheduled asset after the bankruptcy case has been closed, the trustee can reopen the case and then liquidate that asset for the benefit of the previous creditors. It is then up to the trustee and the judge overseeing the case to potentially prosecute for bankruptcy fraud.
Chapter 13 allows debtors to retain ownership of their assets as well as pay off their creditors on their own terms. Thus, chapter 13 is a great alternative to chapter 7 for those that have the means of repayment.
