Types of consumer bankruptcy Lawyer Manual

Federal statute: 11 USC § 101 et seq. Note: specific statutory links are provided below

Consumers have two very different bankruptcy options:

• Chapter 7
• Chapter 13

Chapter 7

This option liquidates non-exempt assets to pay debts and leaves the debtor with little or no further responsibility to repay.

Chapter 7 is best for those who:

• Can exempt most of their assets;
• Need not worry about non-dischargeable debts (11 USC §  523); and
• Have limited excess funds in budget.

Advantages:

• All creditors’ claims are addressed at once, in one forum, in a Chapter 7 proceeding;
• An automatic stay stops further collection action by creditors until the bankruptcy is closed; and
• Chapter 7 allows the debtor to protect certain exempt assets from liquidation for the satisfaction of debts, see below for a list of exemptions.

Disadvantages:

• Chapter 7 will discharge most but not all debts;
• The client may have to give up non-exempted property for sale by the trustee;
• The filing shows up on the consumer's credit report; and
• Chapter 7 is available only once every eight years as a remedy, and filing Chapter 7 prevents a debtor from receiving a discharge in a Chapter 13 case for nondischargeable years. 11 U.S.C. § 727(a)(8) and 1328(f)(1)

Thus, it is wise to postpone filing if the situation will remain bad or become worse.

Chapter 13

This option enables the debtor to repay debts in whole or in part over a three to five year period.

Chapter 13 is best for those who:

• Have a stable and regular income;
• Are behind on secured debts but could pay them over time;
• Have debts that are non-dischargeable under Chapter 7 but are dischargeable under Chapter 13;
• Have assets more than the statutory exemption levels;
• Want automatic stay to protect co-debtors while paying off joint debt; and/or
• Want to avoid moral stigma of "complete" bankruptcy.

Advantages

• Debtor can submit a plan for complete or partial repayment of debts; and
• After approval of another proceeding, the debtor retains control of assets during the pendency of the case.

Disadvantages

• The plan must provide for the payment of trustee’s fee as well as repayment of debts;
• Chapter 13 is available only once every two years as a remedy; and
• The debtor must have sufficient income to sustain the repayment plan as ordered by the court.