Consumers have several options open when choosing to declare bankruptcy. Chapter 7 of the federal Bankruptcy Code lays out the procedure for a liquidation bankruptcy. In a Chapter 7 bankruptcy, the debtor files a petition with the bankruptcy court. This action leads to an automatic stay, which prevents creditors from taking further action to collect their debts. The bankruptcy court will appoint a third party called a trustee. The trustee liquidates the debtor's assets, and uses any funds collected to pay debts. Often, the debtor's assets are already subject to a lien or exempt from bankruptcy. Any debts remaining after the distribution of funds are discharged, which frees the debtor from any requirement to pay them. However, some debts cannot be discharged through bankruptcy. These include taxes, debts resulting from fraud or malicious acts, and some debts incurred shortly before filing for bankruptcy.
Since the bankruptcy reform of 2005, consumers cannot choose Chapter 7 automatically. If they have enough income, they will be required to choose a Chapter 13 bankruptcy.
A Chapter 13 or reorganization bankruptcy is a better choice for some consumers, when they have a stable income, believe their financial problems are temporary, and want to repay some debt.
As with a Chapter 7 bankruptcy, the debtor files a petition which leads to an automatic stay. The debtor must then file a payment plan, which can take three or five years. Creditors are allowed to give feedback on this plan, but cannot take any further action if it is approved by the bankruptcy court. Once the plan is approved and completed, the debtor's debts are discharged.
A chapter 7 bankruptcy is a liquidation bankruptcy. The debtor files a statement of assets and debts with the court and asks the court to order those debts non payable by the filing debtor. The debtor gets to retain a list of property for the debtor's "Fresh start." In Iowa, this generally means $10,000 of tools of the trade, , $1,000 in the bank account, IRAs/401 Ks,$7,000 of value in a vehicle (the portion of the vehicle not covered by a loan), one rifle and one shot gun, and $7,000 of value in household goods.
Any assets over that amount (for example, campers, atvs, snowmobiles) may be taken by the trustee and sold. The proceeds from the sale are then split between the trustee (who take (25%) and all of the creditors of the debtor. This usually results in pennies on the dollar owed.
Chapter 13 has several advantages over Chapter 7 for many debtors, including:
- No 8-year waiting period before filing again for bankruptcy.
- Allows discharge of more types of debt.
- Allows debtors to retain more assets.
Debtors can choose to switch their bankruptcy from one chapter to another, but cannot switch back.
It is possible for creditors to attempt to force a debtor into bankruptcy. However, this requires a minimum number of creditors and a minimum amount of debt. If courts decide against the creditors, they can face tough penalties and be held liable for court costs and damages.
Chapter 13 is also known as the "wage earners plan." In a Chapter 13 bankruptcy case, the debtor has income and develops a plan to repay all or part of the debt over three to five years. During this time, creditors may undertake collection efforts.
When a chapter 13 is filed, a plan is filed with it . This plan is a detailed description of how to pay creditors' claims using future earnings over 3 to 5 years. The payments start with in 30 days of filing even if the plan is not yet approved. Chapter 13 is a reorganization of debt and a court supervised attempt (the plan) to pay debts of the debtor over time. . In a chapter 13 case, some debts can be reorganized, sometimes against the creditors wishes and creditors are placed in different classes, who are paid differently under the plan. You can have more assets in a Chapter 13, but they are less likely to be successful and are far more expensive than a Chapter 7. Many plans fail and are shipped to chapter 7 because the debtors get divorced, lose their income or have other events happen in that 3-5 year plan period.
Debtors and creditors can both benefit from the counsel of an experienced bankruptcy law attorney. The bankruptcy process can be expensive and complicated, and has long-term ramifications. An attorney can help to get you through this process, or advise you on alternatives like counseling or developing a payment plan.
If you would like to schedule a initial consultation contact an Iowa bankruptcy attorney, representing clients in Waverly, Iowa at the Dillon Law P.C. Give us a call at (563) 578-1850 or complete our inquiry form.