Bankruptcy is a complex area of the law that concerns debts that are owed by a consumer or a business. The process of bankruptcy allows a debtor to eliminate or reschedule most debts. There are two forms of bankruptcy available to individuals, Chapter 7 and Chapter 13. Chapter 7 is called liquidation bankruptcy, and under Chapter 7 a debtor's assets are liquidated to provide for payment of debts. Most debts that cannot be repaid are discharged or eliminated and are not repaid by the debtor. In fact, in most cases there is no actual liquidation of a debtor's assets because most things people own are considered exempt from creditors, meaning that creditors cannot claim any interest in them. Also, not all debts can be discharged in Chapter 7. Certain debts are not dischargeable.
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The other type of bankruptcy for individuals is Chapter 13 bankruptcy. Chapter 13 is different from Chapter 7 in several ways. In Chapter 13 bankruptcy, debtors form a Plan for repayment of debts, and make a monthly payment which is proportionately paid to creditors according to this Plan. Not all debts are included in the Plan, as most unsecured debts, i.e., debts not secured to the creditor by any interest in property, are not repaid. Debts that are paid under the Plan are primarily secured debts such as mortgages and car loans, but also so-called priority debts, including domestic support obligations, taxes, and fines. Payments under the Plan will continue for up to fives years and when the Plan is complete, a discharge is entered to eliminate debts not paid. Some debts are not necessarily included in the Plan, but are not discharged and remain due after completion of the Plan. These include student loans.
Chapter 13 also allows debtors to rehabilitate past due amounts on secured debts. Commonly, Chapter 13 is used by debtors to stop a foreclosure proceeding against their home. Under Chapter 13, a debtor who has past due payments owed on a mortgage can provide under the Plan for those past due payments to be paid over the term of the Plan, up to five years. In addition, regular payments on the mortgage continue or are resumed. A bankruptcy filing under any chapter leads to the entry of an order called the Automatic Stay. This is an injunction that prohibits creditors from taking or continuing any action to collect debts or recover property from a debtor. The Automatic Stay goes into effect automatically when bankruptcy is filed, and in enforceable against any creditor. In Chapter 13, this has the effect of interrupting and prohibiting a foreclosure proceeding. The effect is that debtors who are in default on a mortgage are allowed to keep their home while continuing to make regular payments, along with payments on the past due balance under the Plan. Mortgage creditors are obligated by law to accept the Plan and the debtor's ongoing mortgage payments.
Chapter 13 provides broader protections to debtors in various ways other than just a cure of a mortgage default. Some debts remain undischargeable even under Chapter 13, but some debts that are undischargeable under Chapter 7 will actually be dischargeable under Chapter 13. Chapter 13 is the preferred form of bankruptcy under the law, and the filing fee is slightly lower than for Chapter 7. Chapter 13 is far more complex than Chapter 7, with extended proceedings in court. It is unlikely that a debtor can complete a Chapter 13 filing without an attorney.
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