Series: #4 0f 13
In previous articles of this series, we have discussed those sections of the Bankruptcy Code related to Debt Relief Agencies: section 526, restrictions on debt relief agencies and section 527 – disclosures, and section 528 – requirements for debt relief agencies. The next few posts will talk about some of the differences between Chapter 7 and Chapter 13 bankruptcies, and why a debtor would use one versus the other, beginning with deciding on which chapter to file.
Initial Interview / Deciding on which Chapter to File
Most debtors who walk into your office only know about Chapter 7 bankruptcy and have some common misconceptions about how a Chapter 7 works, how it differs from a Chapter 13 bankruptcy, and how much paperwork they will need to provide to properly prepare and advise the Chapter 7 trustee and the court. Many debtors incorrectly believe that Chapter 7 is a simple process available to all persons and simply allows the debtor to discharge debts. However, these ideas are incorrect and oftentimes misunderstood.
Very generally speaking, all persons who reside, have a place of business, or own property in the United States may file for bankruptcy in a federal court under Chapter 7 (“straight bankruptcy”, or liquidation) except for railroads, insurance companies, and certain banking institutions. However the debtor is not eligible for a Chapter 7 discharge if the debtor has received a Chapter 7 discharge in the prior eight years or a Chapter 13 discharge in the prior six years unless the plan paid at least 70% of claims and was proposed in good faith (See 11 U.S.C. Section 727*(a)(8)-(9)).
In addition a debtor may not be qualified to file a Chapter 7 if filing the Chapter 7 would be an abuse of the Chapter 7 provisions. To get debtors in the right “mindset” I start every initial interview advising that there is no “free ride” in any chapter of bankruptcy and that the goal of bankruptcy (regardless of the chapter) is to attempt to get some money for the general unsecured creditors in exchange for certain debts being discharged.