Bankruptcy proceedings

There are four kinds of bankruptcy proceedings that are commonly referenced by the different chapters of the federal bankruptcy code that covers them:

-- Chapter 7 is the most common type of bankruptcy proceeding. Chapter 7 is available to individuals, married couples, corporations and partnerships. In this proceeding, individual debtors may seek a discharge of their unsecured debts, meaning that they are extinguished by order of the bankruptcy court at the end of the proceeding. Unless there are problems in the case, individual debtors are usually able to get a discharge within four to six months of filing the case.

As in all bankruptcy filings, the filing of a Chapter 7 proceeding imposes an automatic stay on all creditors, which prevents them from trying to collect their debts without first getting approval of the bankruptcy court. A bankruptcy trustee is appointed to the debtor's case, who controls all of the debtor's assets. All creditors must be given notice of the proceeding. The trustee then identifies which assets of the debtor are exempt from the bankruptcy proceeding (such as personal effects, household goods, qualified retirement funds), and those that will be sold to pay off creditor claims.

A Chapter 7 is a liquidation proceeding, which means that the debtor's non-exempt assets, if any, are sold or otherwise liquidated by the trustee. The proceeds are distributed to creditors according to the priorities rules established by the federal bankruptcy code.

Any wages the debtor earns after the case is begun are the debtor's, beyond the reach of creditors who had claims on the date of filing.

-- Chapter 11 is a reorganization proceeding, typically for corporations or partnerships. A business in financial trouble may elect to file a Chapter 11 petition to try to reorganize outstanding debts and continue to operate the business. There's an automatic stay, just like any other bankruptcy proceeding. Unlike a Chapter 7 proceeding, though, a business that files a Chapter 11 proceeding will become a debtor-in-possession, and there will initially be no bankruptcy trustee appointed. The debtor-in-possession is given an opportunity to prepare a plan of reorganization that must be approved by a majority of the creditors. If a plan is approved by the creditors and is confirmed by the court, it binds both the debtor and the creditors to its terms of repayment. Under the plan, the debtor-in-possession can reduce debts by repaying a portion of its obligations and discharging others. It can also terminate burdensome contracts and leases, recover assets, and rescale operations to get back to profitability. Under this chapter, a business normally goes through a consolidation period and comes away with a reduced debt load and a reorganized business. Plans can call for repayment out of future profits, sales of some or all of the assets, or a merger or recapitalization. Generally, the plan of reorganization must provide for paying creditors at least as much as they would have been entitled to be paid in a Chapter 7 liquidation proceeding.

It isn't easy to salvage a business in a Chapter 11 proceeding, and many of them end up converting to a Chapter 7.

-- Chapter 12 is a simplified reorganization for family farmers, modeled after Chapter 13. The debtor retains his property and pays creditors out of future income.

-- Chapter 13 is a repayment plan for individuals only. It protects the debtor from collection action during the case and discharges any unpaid balance of dischargeable debts at the end of the plan. It's a powerful tool for debtors to regain control of their financial lives and to get a meaningful fresh start. A debtor must have a regular income and less than $922,975 in secured debt (debt involving property that your creditor might take if you don't make your payments) and $307,675 in unsecured debt. The debtor keeps his property and makes regular payments to the Chapter 13 trustee out of future income, to pay creditors over time (3-5 years). Repayment in Chapter 13 can range from 10% to 100% depending on the debtor's income and the makeup of the debt. Certain debts that cannot be discharged in Chapter 7 can be discharged in Chapter 13 (which is one incentive for a debtor to choose this type of proceeding over a straight liquidation under Chapter 7). Chapter 13 also provides a mechanism for individuals to prevent foreclosures and repossessions, while catching up on their secured debts.

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We went the chapter 13 route. Had no choice. We are repaying @ < 6%, in New York State! This cleared away all our unsecured debt, i.e. ALL credit cards and store debts. Should've looked into this before I took a loan against my retirement. Dumb! Dumb! Dumb! But, we were trying to fix things ourselves. Now I have to repay that loan when the chapter 13 would've cleared the table of this debt.

Credit Card companies should shoulder much more of this debt than they are. They are playing the odds that they will collect much more than they have to lose. Those climbing rates are outrageous!

One humongous lesson learned! We will never own another credit card!