When you are considering bankruptcy, the terminology alone can make your head spin. There are many different types, and each has its own requirements and restrictions. It is difficult for an individual to know which type will be right for them. Of course, it is always best to speak with an attorney. Bankruptcy is a particularly complicated area of law and affects your day-to-day life in many important ways. If done successfully, filing for bankruptcy means relief from creditor harassment, the threat of wage garnishment and never-ending bills and late fees.
Because of the huge impact to your quality of life bankruptcy will have, it is worth doing the research and talking to a lawyer you trust. At Mariano & Coiro, P.C. we have decades of experience in this area alone. We can talk you through your bankruptcy options and in the meantime, offer some basic information on the difference between the two most common types of bankruptcy: Chapter 7 and Chapter 13. Both can be used by individuals but they have some very different qualities.
Chapter 7 Bankruptcy
Chapter 7 is a classic “liquidation”-type bankruptcy, which discharges (cancels) most or all of your “unsecured” debt (credit cards, medical bills, personal loans, etc.). “Liquidation” means that in order to clear your debts, all nonexempt property is typically required to be sold. Exempt property varies by state, but New Jersey exemptions are very generous, and exempt property includes things like most types of pensions and retirement benefits, some personal property and certain amounts of equity in your car and home. A bankruptcy lawyer will help a filing individual determine ahead of time which of their assets are exempt, so they will know what to expect before they file.
To qualify for Chapter 7 bankruptcy, an individual must pass a “means test”. This test is designed to ensure that only people below a certain threshold of disposable income per month can utilize this type of bankruptcy. It is important to not try to pass assets to friends or family in order to pass this test. All bankruptcy proceedings include a “lookback period” where the court will examine your finances and look for this type of activity.
There are benefits specific to each type of bankruptcy, depending on your own personal situation and your immediate financial or legal concerns. One significant benefit to Chapter 7 bankruptcy is that it is fast. An individual who successfully files for Chapter 7 bankruptcy can have their debts discharged in less than six months.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is a “reorganization”-type bankruptcy. This means that in filing, an individual and their attorney will develop a plan to repay arrearages on “secured” debt (like the loans on your home and motor vehicles), as well as some unsecured debt, over a three-to-five-year period. The payments are made through a court monitored repayment plan. In most cases, if an individual successfully completes the court approved plan, the debtor will end up paying less than what the debts owed, and in many cases, any debts not paid in the plan are ultimately discharged.
The biggest benefits to filing a Chapter 13 bankruptcy include, the immediate cessation of any foreclosure, wage garnishment or other legal process against you, and the prevention of any creditor action against you so long as you comport with the court approved repayment plan.
It’s important to know that no matter what type of bankruptcy is used, assets like a home, retirement accounts and a primary vehicle can be protected. However, Chapter 13 bankruptcy (unlike Chapter 7) allows individuals to keep most assets or personal property and belongings, irrespective of their value.
How to know what type is right for you
With all these considerations, it can very be difficult to know which type of bankruptcy is right for your individual situation. This is where the help of an experienced bankruptcy attorney is priceless. At Mariano & Coiro, P.C. our team has decades of experience in helping people like you. You can speak with a member of our team, get the right information for your situation and move forward with confidence.