1. Bankruptcy Questions - Brasca Law Office - Jacksonville, FL 

    

What is the difference between Chapter 7 and Chapter 13 bankruptcy? Which one lets me keep my property? And will bankruptcy wipe out all my debt? 

Credit card debt. Bankruptcy is very good at wiping out credit card debt; this is precisely the kind of debt that bankruptcy is designed to eliminate. Unless you have a special "secured" credit card, most of your credit card balance is unsecured debt -- that is, the creditor does not have a lien on any of your property and cannot repossess any items if you fail to pay the debt. Besides credit card debt, you may have other unsecured debts, such as medical bills or utility bills, and bankruptcy can wipe these out as well.

If you file for Chapter 13 rather than Chapter 7, it is possible you may have to pay back some portion of your unsecured debts. However, any portion of your unsecured debt that remains once your repayment plan is complete will be discharged.

Property liquidation. In Chapter 7 bankruptcy, you get to keep any property that is classified as exempt under the state or federal laws available to you (such as your clothes, car, and household furnishings). Most debtors who file for Chapter 7 bankruptcy are pleased to learn that all of their personal property is exempt. However, there are some circumstances, where some of your property may have to be sold to pay down your debt. This happens when the amount of property you own exceeds the permitted amount of exemptions. Also, in certain circumstances, an income tax refund may be seized by the bankruptcy trustee.  

Although state exemption laws differ, states typically allow you to keep these types of property in a Chapter 7 bankruptcy:

• Equity in your home, called a homestead exemption. Florida's bankruptcy laws allow debtors to protect all or most of the equity in their home.
• Insurance. You usually get to keep the cash value of your policies.
• Retirement plans. Most retirement benefits are protected in bankruptcy.
• Personal property. You'll be able to keep most household goods, furniture, furnishings, clothing (other than furs), appliances, books and musical instruments, valued up to $1000.00 . Florida let you keep a vehicle as long as your equity doesn't exceed one thousand dollars.
• Public benefits. All public benefits, such as welfare, Social Security, and unemployment insurance, are fully protected.
• Tools used on your job. You'll probably be able to keep mostr of the tools used in your trade.

You lose no property in Chapter 13 because you fund your repayment plan with your income.

Secured debt. If you owe money on a secured debt (for example, a car loan for which the car is pledged as a guarantee of payment), you have a choice of continuing your payments on the property under the contract (reaffirming the debt); allowing the creditor to repossess the property; or paying the creditor a lump sum amount equal to the current replacement value of the property. Some limited types of secured debts can be reduced or eliminated in bankruptcy, such as a second mortgage in a Chapter 13 filing.

Non-dischargeable debt. Certain debts cannot be discharged in bankruptcy; you will continue to owe them just as if you had never filed for bankruptcy. These debts include back child support, alimony, and certain kinds of tax debts. Student loans will not be discharged unless you can show that repaying the debt would be an undue burden, which is a very tough standard to meet. And other types of debts might not be discharged if a creditor convinces the court that the debt should survive your bankruptcy.

Tax Debts. Most tax debts can't be wiped out in bankruptcy -- you'll continue to owe them at the end of a Chapter 7 bankruptcy case, or you'll have to repay them in full in a Chapter 13 bankruptcy repayment plan. You can discharge (wipe out) debts for federal income taxes in Chapter 7 bankruptcy only if all of the following conditions are true:

• The taxes are income taxes. Taxes other than income, such as payroll taxes or fraud penalties, can never be eliminated in bankruptcy.
• You did not commit fraud or willful evasion. If you filed a fraudulent tax return or otherwise willfully attempted to evade paying taxes, such as using a false Social Security number on your tax return, bankruptcy can't help.
• The debt is at least three years old. To eliminate a tax debt, the tax return must have been originally due at least three years before you filed for bankruptcy.
• You filed a tax return. You must have filed a tax return for the debt you wish to discharge at least two years before filing for bankruptcy.
• You pass the "240-day rule." The income tax debt must have been assessed by the IRS at least 240 days before you file your bankruptcy petition, or must not have been assessed yet. (This time limit may be extended if the IRS suspended collection activity because of an offer in compromise or a previous bankruptcy filing.)

Tax Liens. Bankruptcy will not wipe out prior recorded tax liens. A Chapter 7 bankruptcy will wipe out your personal obligation to pay the debt, and prevent the IRS from going after your bank account or wages, but if the IRS recorded a tax lien on your property before you file for bankruptcy, the lien will remain on the property. In effect, this means you'll have to pay off the tax lien in order to sell the property.

Am I free to choose between Chapter 7 and Chapter 13? Which type of bankruptcy should I use?

If you meet the eligibility requirements for both, then you can choose the type of bankruptcy that makes the most sense for your situation. Your income determines whether you can file Chapter 7 or must file Chapter 13 instead.

Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, you are not eligible to file Chapter 7 if your average gross income for the six-month period preceding the bankruptcy filing exceeds the state median income for the same size household. Filers whose incomes are higher than the median income for a family of their size in their state may not be allowed to file for Chapter 7 bankruptcy, and instead may be required to file Chapter 13.

Most people who file for bankruptcy choose to use Chapter 7 if they meet the eligibility requirements; Chapter 7 is a popular choice because, unlike Chapter 13, it doesn't require filers to pay back any portion of their debts.

However, if you are behind on your house or your car payments, and want to keep the property, then Chapter 13 might be a better choice, depending on your situation. For example, if you are behind on your mortgage and want to keep your house, you can include your missed payments in your Chapter 13 plan and repay them over time. To file Chapter 7, you would have to make up the whole past due amount right away to be able to keep your house, otherwise the mortgage company can get the Court to release the property to them. 

In order to qualify for Chapter 13, you have to propose a repayment plan and demonstrate to the bankruptcy court that you will have enough income, after subtracting certain allowed expenses and required payments on secured debts (such as a car loan or mortgage), to meet your repayment obligations. You create a payment plan proposing how you plan to handle your debts over the payment plan period, which can be 36, 48, or 60 months. Your plan must agree to pay back certain debts in full, or the judge will not confirm (approve) your plan. Once your plan is confirmed, you make monthly payments to the bankruptcy trustee, an official appointed by the bankruptcy court to oversee your case. The trustee in turn pays your creditors. You must make every payment, on time, in order to successfully complete your plan and get a discharge of your remaining debts.