Chapter 7 gives you a fresh financial start by legally erasing most of your debts. That’s great if your debts are simple ones.
Simple Debts and Complicated Ones
You have debts that are overwhelming you. If you go through a procedure called Chapter 7 “straight bankruptcy,” in about three months all or most of your debts would be gone. They would be discharged,” written off forever. You’d have a fresh financial start.
But often life is more complicated than that.
You may have special debts that you don’t want to write off, like your home mortgage or your vehicle loan because you want to keep your home or your vehicle. But you may be behind on those payments and need extra time to catch up.
Or you may have debts that you can’t erase, like your child support or certain taxes. You need help dealing with them.
Secured debts that are those whose payment is secured by something you own, like your home, vehicle, or furniture. Usually you’ll know if a debt is secured, but sometimes it’s not clear. For example, sometimes your debt for purchases of furniture, appliances, electronics and such are secured by what you bought, sometimes they’re not. Some cash loans are secured by collateral while others are not. Most credit cards are not secured but some are.
Secured debts can often be handled in a Chapter 7 case. It depends on whether you want to keep the property securing the debt, whether you are current on the payments, and how much you owe compared to the value of what is secured. As you’ll see in some upcoming blog posts, there’s much more to secured debts than whether the debt will be discharged.
As you’ve heard, not every kind of debt can be discharged in a Chapter 7 bankruptcy.
Broadly speaking, there are two kinds. First are those that don’t get discharged regardless whether the creditor does anything about it or not. Second, those that do get discharged unless the creditor objects during your bankruptcy case.
The first kind, in which the creditor doesn’t need to complain, includes child and spousal support, and certain income taxes, among others. The second kind, in which the creditor has to complain to avoid discharge, and to do so by a strict deadline, includes bounced checks, credit card advances and purchases shortly before filing bankruptcy, among others.
Your bankruptcy lawyer will be able to tell you in advance whether you have any debts of the first kind. But he or she will not necessarily be able to tell about the second kind. That’s because with those you have to wait to see if the creditor is going to raise an objection or not. But even with those often your lawyer can have a good idea whether there’s a risk that a creditor will object, based on whether it may have legal grounds to do so.
If you have any non-discharged debts of either kind, how much you have, and how such debt would be treated under Chapter 7 vs. Chapter 13 influence whether bankruptcy is an appropriate solution for you, and if so under which Chapter to file.
If all of your debts are unsecured and should be discharged in bankruptcy, you will tend towards filing a Chapter 7 case. Even if you have some secured and/or non-discharged debts, Chapter 7 may still work, depending on how large they are and how cooperative the creditors.
Chapter 13 is often the better solution if you have a lot of secured and/or non-discharged debts, and/or their creditors need to be legally pushed beyond what they would voluntarily do.
The next few blog posts will look at how both Chapters can help you with these more complicated types of debts.