In this section we will detail the two types of bankruptcy that are used by 99% of individual debtors who file in Riverside and San Bernardino county.
Chapter 7 – Liquidation
Purpose: The main goal of filing bankruptcy under Chapter 7 is to become free of debt and out of bankruptcy as quickly as possible. Debtors are allowed to keep a limited value of assets, and anything above that value will be paid to creditors. Although it’s called a liquidation bankruptcy, the vast majority of people who file Chapter 7 will not lose assets or be forced to sell property.
Duration: Most Chapter 7 bankruptcy cases last 3 to 4 months from the date of filing until final discharge.
Impact on credit report: A Chapter 7 bankruptcy will remain on your credit for up to 10 years.
What debts can be discharged: Credit cards, medical bills, taxes over 3 years old, personal loans, payday loans, balances on car loans and mortgages, (after the property is returned) gambling debt, and bad checks. Generally any unsecured or secured loan contract that you voluntarily signed.
Debts that CANNOT be included: Support obligations for child or spousal support, debts arising from intentional fraud, debts from other criminal actions, debts resulting from death or personal injury caused by unlawfully operating a motor vehicle, vessel, or aircraft under the influence of intoxicants, and student loans. There may be other types of debt that are not eligible for discharge so ask your attorney.
Secured debt: In a Chapter 7 bankruptcy, you are generally allowed to keep secured property such as a house or a car as long as you keep making the payments. You always have the option to give up the property and discharge the debt.
Qualifying: Since the bankruptcy reform act of 2005, you must now prove that your income is either under the median income for the state, or that your net income after expenses is extremely small. People who make too much money will not be allowed to file under Chapter 7 and may be forced to file under Chapter 13.
Mandatory credit counseling: Anyone filing bankruptcy must take a short credit counseling course both before and after their case is filed. These are generally completed online and cost from $10-30.
How often can you file: Current law limits you to one Chapter 7 bankruptcy filing every 8 years.
Chapter 13 – Reorganization
Purpose: Debtors filing under Chapter 13 are using bankruptcy laws to consolidate debt into a single monthly payment. Generally there is either debt that cannot be discharged under Chapter 7, (child support arrears, recent taxes, student loans) or debt that is secured by property the debtor wishes to keep. (usually a mortgage) Some people are also forced into filling under Chapter 13 because they have income too high to qualify for Chapter 7.
Duration: A Chapter 13 bankruptcy will last a minimum of 3 years to a maxium of 5 years. The duration is determined by how much debt a person is attempting to pay back and how much disposible income is available to accomplish the task.
Impact on credit report: A Chapter 7 bankruptcy will remain on your credit for up to 7 years.
What debts can be discharged: All types of debt listed for Chapter 7. In addition, you can include three additional types of debt. Property obligations in a divorce, debts from willful and malicious injury to property, and debts incurred to pay non-dischargeable tax obligations.
Debts that CANNOT be included: Same as Chapter 7 with the exception of the three types listed above.
Secured debt: In a Chapter 13 bankruptcy, secured debt such as a car loan is usually rolled into your montly Chapter 13 plan payment. Mortgage payments are usually paid directly to the creditor like always.
Qualifying: Debtors filling under Chapter 13 must show that they have enough income to pay monthly living expenses AND enough income left over to make a monthly consolidtated debt payment.
Mandatory credit counseling: Anyone filing bankruptcy must take a short credit counseling course both before and after their case is filed. These are generally completed online and cost from $10-30.
How often can you file: Although you can generally file a Chapter 13 case at any time, you cannot receive a discharge of debt until 4 years following a previous Chapter 7 discharge or two years following a Chapter 13 discharge.