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BANKRUPTCY


 

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Chapter 7 Relief


Cases filed under Chapter 7 of the Bankruptcy Code do not require a plan of debt repayment, and result in the discharge (elimination) of most unsecured debts.   Some debts, such as student loans and most tax obligations, are rarely discharged.  Chapter 7 exposes consumer assets to liquidation to pay unsecured debt.   A combination of state and federal law is used to determine the extent to which assets can be protected in bankruptcy.

Many consumers still believe 2005 changes to the law sharply limited access to Chapter 7.  However, most consumers still qualify for this basic form of bankruptcy. In Indiana, individuals can earn nearly $40,000.00 per year, or a family of five (5) almost $75,000.00, and still easily qualify. If these thresholds for household size and income are exceeded, closer scrutiny is required to determine whether Chapter 7 is an option.
 
With few exceptions, from the moment your Chapter 7 case is filed, creditors cannot continue collection of your debts, whether by phone call, correspondence, or legal action, and successful completion of your case means most them will be permanently prevented from doing so.  If creditors violate your bankruptcy protection, they can be brought before the Bankruptcy Court for penalty.

The primary tasks for your attorney are to insure you understand the bankruptcy process and alternatives to it, make certain you qualify for Chapter 7 relief, and that you understand your exposure, if any, to asset liquidation.  Your attorney will also assist you in deciding what to do about secured debts such as home and auto loans, which can be reaffirmed (excluded from bankruptcy), discharged, or in the case of auto loans, sometimes refinanced on better terms.  

It is quite typical for Chapter 7 filers to keep their homes and vehicles.  If you do not qualify for Chapter 7 relief, Chapter 13 relief is probably still an option.  Regardless of whether you ultimately file under Chapter 7, or Chapter 13, you cannot speak with an attorney too soon if contemplating filing bankruptcy.  Doing so can help avoid potential complications when you finally file.
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Chapter 13 Relief
 
Higher income consumers are typically required to file Chapter 13 bankruptcy, though extraordinary circumstances can sometimes support them filing a Chapter 7 case.  Some consumers who qualify for Chapter 7 can be motivated to file Chapter 13 for special purposes.

Chapter 13 bankruptcy requires a close examination of the consumer's budget and commitment of all income deemed available by law to pay at least a small percentage of credit card, medical, and other unsecured debts over a period of 3-5 years.  Unlike debt management plans, a Chapter 13 plan does not require creditor consent to the plan. Given this, and the fact Chapter 13 plans are built on ability to pay, few debt management plans can rival Chapter 13 for handling extraordinary levels of debt.

Certain debts not ordinarily discharged in bankruptcy, such as student loans or taxes, can sometimes be discharged or more effectively managed in a Chapter 13 plan than outside bankruptcy. 

Consumers who might lose significant assets in a Chapter 7 case can sometimes develop a Chapter 13 plan that affords them the basic protections of bankruptcy, while allowing them to retain assets that would be lost in a Chapter 7 case.

Arrears on secured debts such as home and auto loans can be brought current with a Chapter 13 plan.  The terms of older auto loans can also sometimes be significantly modified.  Prior to the recent foreclosure crisis, Chapter 13 was the chief tool for fighting foreclosure.  Lender and government response to the crisis resulted in more significant numbers of mortgage loan modifications being used to resolve foreclosures.  
 
This office will discuss both loan modification and Chapter 13 with clients who are primarily responding to a foreclosure situation.  Chapter 13 remains the best choice for some homeowners.  In some instances, second mortgages can be completely eliminated and the debts they secure discharged.

Because of the required commitment to a plan of partial debt repayment, Chapter 13 sounds far less attractive to most consumers, and that is entirely understandable.  However, it is the only form of bankruptcy protection available to some consumers, better than none at all, and at times uniquely useful even to consumers who have the option of filing under Chapter 7.