When non-business debtors contemplate the option of bankruptcy, they need to first decide whether to file under Chapter 7 (liquidation) or Chapter 13 (reorganization) of the U.S. Bankruptcy Code. The effect of the filing is to let someone saddled with debt to discharge or reduce debts. It also has the added benefit of serving as a court order to creditors and their collection agencies to stop hassling you through telephone calls, letters, and personal contact in an effort to get you to pay the debt. This is called temporary automatic stay.
Chapter 7
Filing for chapter 7 bankruptcy does not mean that immediately all of your debts are eliminated in their entirety. Rather, secured debt must be still be dealt with. It does mean, however, that commonly unsecured debts like credit card bills and medical expenses do not have to be paid back. But getting off the hook here does not come without costs. Rather, filing chapter 7 often means the necessary liquidation (selling off) of most of your personal property that are not exempted under the law. While there are limitations to what can be confiscated by creditors, (such as your home under the homestead protection), expect that the U.S. Trustee will sell off most of your valued possessions, including your home (if it has equity), to pay part of your debts to them. In addition, your credit rating will be adversely impacted by this filing. You will find it very difficult, if not completely impossible, to get a mortgage for a new home, a car loan, a credit card, and even limits very small forms of credit like appliance financing and at times payday loans.
Chapter 13
Chapter 13 filing means quite simply that you are restructuring your debt by negotiating with your creditors and establishing a plan to pay them off over the course of three to five years. So, this is a formal declaration that you will and have worked with creditors so that they will get some or all of their money. By promising to pay off your debts, you are allowed to keep valuable personal property such as your home and car. Typically the arrangement reached with creditors is to have you pay your regular monthly payments, plus an additional amount that over time allows you to get caught up on your payments over time.
If you have related needs, give our lawyers a call today. Business and corporate attorneys at Schein & Cai LLP in San Jose, California (capital of Silicon Valley, San Francisco Bay Area) can help you handle the most complicated cases of bankruptcy.
