There are different kinds of Bankruptcy that are available to people, they are called Chapters.   Chapters 7 and 13 are the most common for individual debtors caught up in overwhelming debt.  The Law Office of Thomas E. Brownfield provides detailed information about each of these Chapters to our clients. 

After your FREE one hour consultation, we will be able to direct you to the Chapter that is suitable for your current situation.

Chapter 7 is the smallest, easiest and least expensive type and has the following general characteristics:

1.    The total pendency (or duration) of an uncontested Chapter 7 Bankruptcy case is about 6 or 7 months (which in legal terms is very fast).  

2.    A Chapter 7 Bankruptcy will discharge all debts that can be discharged almost immediately (the official discharge of creditors will usually not occur until about 4 months after filing, but due to the immediate “stay” that takes effect upon the filing of the petition, the effect to the client is, for the most part, that their debts are no longer an issue i.e., phone calls from creditors will cease, lawsuits, levies, garnishments, etc., all will stop).   However, please note the following:

a.    All secured creditors (mortgages, car payments, lease or rent obligations) must be current if you want to keep the house, car, or stay in the premises.

b.    Some debts are not dischargable i.e., spousal or child support arrears, some taxes, loans for tuition, etc.

c.    Most credit card accounts will likely be closed, even if you are current with the payments and even if you have a zero balance.   If you want to keep a credit card that has a zero balance, the best thing to do is to call the issuing card company and explain that you are going to file a Bankruptcy petition due to circumstances, but that you would like to keep that account.   There is no law that compels a credit issuing entity to keep the account open or to close it but most credit issuing companies have a policy of simply closing the account.   

For the most part, after filing a Chapter 7 Bankruptcy, a cash and carry policy must usually be adopted while improving the financial situation and then re-establish credit gradually.   Improving credit scores can easily be done but usually takes 2 – 3 years.

Note:   Under the 2005 changes to the Bankruptcy Code, a debtor must now qualify for a Chapter 7.   Basically, the way one qualifies for a Chapter 7 is by NOT having too much income as determined by a “Means Test”.

Chapter 13  is a bigger and more expensive type of Bankruptcy and is often times avoided by debtors.   A chapter 13 can be a 5 year thing or a 3 year thing depending on the debtor’s circumstances and whether or not the debtor can qualify for the 3 year plan under the “Means Test” referenced above.   Oddly enough, even though the Chapter 13 is more expensive in terms of attorney fees and the amount of participation by the Bankruptcy Trustee, the court filing fees are a little less than a Chapter 7.   Sometimes if a debtor cannot qualify for a Chapter 7, a Chapter 13 - 5 year plan may be the only option.   However, there are some things that can be done in a Chapter 13 that cannot be done in a Chapter 7.   These things can make the Chapter 13 an attractive option in spite of the extra time and costs.   These things include:

1.    Lien Stripping.   If a home owner has multiple Trust Deeds on the home (i.e., a 1^st and a 2^nd TD), the 2^nd and 3^rd, as the case may be, are called “junior liens”.   In today’s housing market it is common to be “upside down” on the mortgage, that is, the current market value of the house is less than is owed on the combined mortgages.   In some cases, if the value of the home is less than what is owed on the 1^st mortgage a homeowner may be able to “strip” the junior liens in a chapter 13.  

a.    For example:   A homeowner owed $500,000 on a 1^st mortgage, $180,000 on a 2^nd, and about a $100,000 in credit cards.   Because the value of the home was less than what was owed on the 1^st, a Chapter 13, five year plan was developed with monthly payments of about $270.00 for 60 months. (Monthly payment amounts depend on the individual's disposable income and varies from case to case).  Over the course of the 60 months, the homeowner paid about $23,000 including attorney fees, court filing fees and the monthly payments.   At the end of the 60 months, the homeowner’s credit card debt and the 2^nd mortgage were discharged.   So in this case, for about $23,000, paid over the course of 60 months, the homeowner permanently discharged $280,000 in debt and left the Bankruptcy with only a 1^st mortgage on his house.  

2.    Curing Arrears.   In many cases, homeowners have been trapped in a nightmarish loan modification process that eats away at nerves and resources.   Often times, homeowners are told that the only way that a bank will take a loan mod request seriously is if the homeowner is behind in payments.   While this may be a true fact, it is usually very bad advice.   Nevertheless, in a desperate attempt to stave off upcoming interest only balloon payments, or anticipated interest rate or payment increases, or simply in the realization of increased credit card payments or reduced income, the homeowner will stop making the mortgage payments and then submit a loan mod application to the bank.   Usually the homeowner will try to corral the mortgage payments and save them in the event the loan mod fails and then be able to cure the arrears (back payments).   Unfortunately, the three or four months the homeowner thought it would take to get the loan mod can turn into 9 months or a year.   By this time the monthly payments that would have been paid to the bank have been evaporated by other demands during the course of the loan mod process.  

In a Chapter 13, if the finances of the debtor have improved but not sufficiently to cure the arrears in time under an acceleration clause on the mortgage, the debtor can have up to 5 years to cure the arrears if he can manage the Chapter 13 plan payments as well as the regular monthly mortgage payments and ordinary expenses.   Moreover, the debtor will not have to pay any of the other dischargeable debts (i.e., credit card bills, medical bills, etc.), during the Chapter 13 plan period.   Sometimes, by simply eliminating the other monthly credit card or other debt service payments, the homeowner can actually be paying less in the Chapter 13 plan monthly, while curing the arrears, than before the bankruptcy and may be able to save the house from foreclosure.

3.    Tax problems.   A Chapter 13 can be an attractive option to stop penalties and interest on non-dischargeable taxes (i.e., income taxes that are not yet old enough to discharge, or employer payroll taxes unpaid during the operation of a business, etc.).   During the Chapter 13 plan period, a debtor can have up to 5 years to repay tax debts without the punitive penalties and interest that can be higher than even the highest interest rates of credit cards.

Chapter 11  is referred to as a business reorganization Bankruptcy.   However, some individuals that have secured or unsecured debt amounts that exceed the Chapter 13 limits may have to consider a Chapter 11 to manage and discharge debt.   Chapter 11 bankruptcies are brutal.   It is the most demanding of the three Chapters in Bankruptcy.   The participation of the debtor and the debtor’s attorney are exhausting and extremely costly.   A typical minimal Chapter 11 retainer fee starts at about three times that of a Chapter 13 and the filing fee alone is over $1,000.00.  But even if this is the direction that you need to go, our office can represent you through the process and can assist you with becoming successful in the end.