Authored By: Legal Aid Services of Oklahoma, Inc.
How Do I Know Which Type of Bankruptcy Is Right For Me?
The best way to figure out which chapter of bankruptcy is right for your financial situation is to speak with a lawyer who has experience in the area of bankruptcy. However, you can get an idea of the chapter that will work best for you, simply by learning a little bit about the differences between the bankruptcy chapters. An individual who wants to file bankruptcy may file either a Chapter 7 or a Chapter 13 bankruptcy. The differences between the two are as follows:
CHAPTER 7 BANKRUPTCY
Chapter 7 bankruptcy is what is commonly known as "the clean start" or "the fresh start" bankruptcy. It is what most people think of when they think of bankruptcy. In a Chapter 7 bankruptcy, you "discharge" all of your debt. That means you do not have to pay the debt. The whole process takes about 90 days. You will be required to attend a short, informal meeting with a Trustee during the bankruptcy.
When you file bankruptcy, you must list ALL of your debts, even those debts that you wish to keep. You may have a car loan or a home mortgage that you would like to continue paying because you want to keep your car or home. You can keep them, but you must list them on the bankruptcy. In a Chapter 7, when you want to keep a debt you can sign a "Reaffirmation Agreement" with the creditor. A Reaffirmation Agreement is an agreement that is filed with the court that informs the court that you and the creditor have agreed to let you keep the debt and the collateral, even though you have filed bankruptcy. In most cases, the creditor will require that you be current on your payments before they will agree to sign a Reaffirmation Agreement.
When you file a Chapter 7 bankruptcy, all of your property becomes part of what is called the "bankruptcy estate." It does not mean that you will lose everything. It means that if you own certain types of property, the court can take it and sell it to pay your debts. The court cannot take most property that ordinary individuals have. Oklahoma law exempts your home, your car, your clothing, your household items and various other items. There are limits on the value of the property that you can keep, but they are well above what most individuals have. The court appoints a "Trustee" to each bankruptcy case. It is the Trustee's job to look closely at your property to see if there is anything that is not exempt from sale. For instance, if you owned an airplane, that would probably be taken and sold.
Most people do not have a lot of luxurious or expensive property, so there is no danger in filing a Chapter 7. However, you should always check with an attorney if you have any doubts. The issue of what property could be sold by the court may be tricky if you are not familiar with the exemptions. If you own land other than the home that you live in, if you have an expensive car that is paid off, if you have co-debtors, or if you make a lot of money you may find that a Chapter 13 will work best for you.
CHAPTER 13 BANKRUPTCY
A Chapter 13 Bankruptcy is basically a debt-consolidation. What that means is that you pay your debts over a period of time, usually from three to five years. In most cases, the amount you pay will be less than what you actually owe. You pay what you can and the rest is discharged. Creating a "plan" to pay back your creditors is a fairly complicated process and you will definitely need an attorney to help you. A Chapter 13 bankruptcy is best for individuals who owe taxes, are behind on home mortgages, have co-debtors they want to protect, have property that needs to be protected or who have a substantial amount of income left over every month after basic living expenses.
If you want to file a Chapter 13 bankruptcy, you must have a job. You must also be able to show that you will have money left over every month after you deduct living expenses to pay into your repayment plan. You should be aware that new changes in the bankruptcy law may make it necessary for a lot more people to file a Chapter 13 rather than a Chapter 7, especially if there is any income left over after monthly living expenses are taken out.
Either chapter of bankruptcy can provide relief for someone who is drowning in debt. Once you file either chapter of bankruptcy, an immediate protection called an "automatic stay" goes into place for you. The automatic stay prohibits any creditor from taking ANY action, including garnishment, repossession, foreclosure, phone calls or letters to collect their debt from you. If the creditor violates the automatic stay, you can sue them.