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Your basic choice is between a bankruptcy that doesn't involve any type of repayment plan (Chapter 7 bankruptcy), and one that does (Chapters 11,12, and 13). You need to base your decision on what's best for you and your family, not on what you think will make your creditors happy.
Chapter 7: Straight bankruptcy
Chapter 7, which occasionally is referred to as straight bankruptcy, is essentially the belly-up version that most people envision when they hear the word bankruptcy. If you file under Chapter 7, most of your debts are eliminated, and some of your property may go to your creditors. You don't have any repayment plan; your debts simply disappear.
Assets that are nonexempt (or ripe for picking by creditors) may be seized and sold by the trustee, with the proceeds distributed to your creditors. In the real world, however, most consumer bankruptcies fall in the category of no-asset cases. In other words, you have nothing for creditors to take, except the shirt on your back and various other items that are off limits. That's a pretty nifty deal and, if things work out, you've little to lose except your debt.
 | The law won't let you bounce from one spending spree to another using bankruptcy as your escape valve. So, for the most part, whenever you go bankrupt, you can't discharge your debts in Chapter 7 for another six years. |
Chapter 7 has no maximum debt restrictions, so virtually everyone is eligible for bankruptcy relief. However, courts can (and do) dismiss cases when your financial obligations are primarily consumer debts if they find that discharging all debts would result in abuse of the bankruptcy process.
Substantial abuse
Courts agree that the most important consideration in determining whether you're trying to weasel out of your debts is finding out whether you have the ability to pay if you feel like it. However, they don't agree on just what ability to pay means.
One court ruled that a debtor had the ability to pay when she was capable of covering a quarter of her debts over three years. Another ruled that unless a debtor can pay 70 percent of his bills over three years, he didn't meet the ability-to-pay standard. So, without a clear legal standard, you are, to some extent, at the whim of your local bankruptcy judge.
Good faith
In addition to looking at your ability to pay, some judges also consider whether you're acting in good faith. They may ask whether:
- Your bankruptcy was necessitated by sudden illness, calamity, or unemployment.
- You made unnecessary eve-of-bankruptcy purchases far exceeding your ability to pay.
- Your bankruptcy paperwork is complete and accurate.
 | Although you eventually must check with a bankruptcy specialist who's familiar with local judges to get a reading on what to expect, you can do one thing immediately to avert a possible good-faith problem: Make darned sure that your bankruptcy papers are accurate and that you list each and every income and each and every expense. Guesstimating just doesn't cut it. When you don't know the answer, look it up . . . don't make it up. |
Chapter 13: Debt repayment plans
In filing a Chapter 13 bankruptcy, you propose a debt repayment schedule and you pay what you can afford. Creditors usually end up receiving only a small percentage of what they're owed and typically must settle for pennies on the dollar. After that, you're home free.
| A big advantage to a Chapter 13 bankruptcy is known as the super discharge. That's a benefit that can enable you to eliminate debts for fraud, other intentional wrongdoing, marital property divisions, loans to pay federal income taxes, and then some taxes themselves — none of which are wiped out in other forms of bankruptcy. |
Only individuals with regular income can file under Chapter 13. The source of your income isn't important (assuming that it isn't from some criminal activity), provided that it is regular and stable. Your income can be wages, self-employment profits, unemployment benefits, or even assistance of friends and family.
To qualify for Chapter 13, your debts must fall within specific limits. Your unsecured debts — those where nothing, like a car, can be repossessed if you don't pay — can't be more than $290,525. Secured debts can't exceed $871,550. These debt limits are adjusted every three years on the first business day on or after April 1. (The next adjustment will be April 2, 2004.)
Considering other types of bankruptcy
Although your case almost certainly falls under the Chapter 7 or 13 rubric, a few other potential options bear thinking about.
Chapter 11: Large reorganizations
One other form of bankruptcy, which rarely is an option or even a good choice for most nonbusiness debtors, is Chapter 11. Whenever you don't qualify for Chapter 13 and you have substantial assets that you want to continue to control, Chapter 11 may be worth looking into. But a Chapter 11 proceeding is extremely complicated and expensive.
| A Chapters 11 filing is a bankruptcy specialty in its own right. Many lawyers specializing in consumer bankruptcy don't have much experience with Chapter 11 cases. If you go this route, make sure that your lawyer is an experienced Chapter 11 practitioner. |
Chapter 12: Reorganizations for family farmers
Chapter 12 is a special type of bankruptcy reserved for family farmers. Congress recognizes that family farmers play a unique role in our culture and economy that is deserving of special treatment.
If you qualify as a family farmer, Chapter 12 provides most of the benefits of a Chapter 13, and then some. Repayment plans aren't restricted to five years, and you have fewer limitations on the your ability to restructure home mortgages. The downside of a Chapter 12 is that dischargeable debts are limited to those dischargeable in a Chapter 7. So, you don't get the super discharge available with a Chapter 13 filing.
To qualify as a farmer, you must meet each of the following requirements:
- Debts may not exceed $1.5 million.
- Eighty percent of those debts (excluding your home mortgage) must be from farming operations.
- Fifty percent of income from the preceding year must have come from farming operations.
Chapter 20: Adding Chapters 7 and 13
Although no Chapter 20 filing is included the Bankruptcy Code, that term is used to describe the practice of filing Chapter 7 and Chapter 13 at the same time to reap the benefits of both.
For example, if you owe a bunch of credit-card bills and you are under an order to pay restitution under a criminal sentence, you can file Chapter 7 to get rid of the credit-card bills, and then file Chapter 13 to pay the restitution over three to five years.
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