Every year, thousands of Alabama residents file for bankruptcy. The two most used types of bankruptcies are Chapter 7 and Chapter 13. In Chapter 7 bankruptcy, the bankruptcy court will discharge the debtor’s debts. In exchange, the debtor gives up his or her property or directly pays for secured debts. Chapter 7 bankruptcy is often thought of as traditional bankruptcy. In a Chapter 13 bankruptcy, the debtor restructures his or her debt payments to make those payments more manageable.
Our Alabama Bankruptcy Lawyers can Help
Bankruptcy can change a person’s life for the better. At Bouloukos, Oglesby, & Mitchell, we focus a large party of our law practice on helping clients file for bankruptcy. Our skilled Birmingham bankruptcy lawyers help clients understand the differences between Chapter 7 and Chapter 13 bankruptcies. We determine which type of bankruptcy is right for them and guide them through the entire process of filing for bankruptcy. We have served the Birmingham community for over 20 years.
Understanding Chapter 7 Bankruptcy
Chapter 7 bankruptcy is also known as liquidation bankruptcy or straight bankruptcy. Debtors can clear away many different types of unsecured debts by filing for Chapter 7 bankruptcies. Filing for a Chapter 7 bankruptcy can greatly help those who cannot make monthly debt payments and payments for living expenses. While Chapter 7 bankruptcies can help individuals who cannot make payments, they will need to give up some of their assets. Those who file for Chapter 7 bankruptcy must also face a lower credit score.
Who is Eligible to File for Chapter 7 Bankruptcy?
Those who file for Chapter 7 bankruptcies must meet a means test. Only those debtors whose income is lower than the median income in Alabama are eligible for Chapter 7 bankruptcy. In other words, if your income is higher than the median income in Alabama, then you will not qualify to file for a Chapter 7 bankruptcy. Chapter 13 bankruptcy, on the other hand, does not have an income limitation requirement.
For those whose income qualifies them, they must complete a credit counseling course approved by the court. These courses are usually only a few hours long. The debtor must attach a certificate showing that he or she completed the course to his or her petition for Chapter 7 bankruptcy.
Preparing to File for Chapter 7 Bankruptcy
The most important aspect of filing for bankruptcy is to gather all necessary paperwork before you begin the process. Debtors need to gather bank statements, bill statements, notices of overdue payments, and proof of real and personal property ownership. You should also locate any contracts or lease agreements that show the terms of your secured debt agreement.
The Chapter 7 Bankruptcy Process
After filing for Chapter 7 bankruptcy, the bankruptcy court will place a temporary stay on the debtor’s current debts. The bankruptcy court takes legal possession of the debtor’s property. The court also appoints a bankruptcy trustee to manage the debtor’s case. The temporary stay helps the debtor by doing the following:
- Preventing creditors from garnishing the debtor’s wages
- Stopping creditors from collecting payment on debt
- Preventing mortgage companies from foreclosing on the debtor’s home
- Preventing creditors from repossessing motor vehicles
- Preventing eviction and the turning off of the debtor’s utilities
What Does a Chapter 7 Bankruptcy Trustee do?
The bankruptcy trustee has a legal duty to review the debtor’s assets and finances and will oversee the debtor’s Chapter 7 bankruptcy. The trustee determines which property is non-exempt. Trustees sell the nonexempt property and use the proceeds to pay off the debtor’s creditors. Trustees also arrange a creditor meeting. During this meeting, the debtor and creditors will answer questions about his or her bankruptcy filing. At the end of a Chapter 7 bankruptcy, the court will discharge the debtor’s remaining debt including credit card debt, past due rent, medical bills, and other unsecured debts.
What Constitutes Exempt Property in a Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is called liquidation bankruptcy because the debtor liquidates or sells his or her assets in order to pay off debts. Debtors must turn over certain property to the bankruptcy trustee who is managing the bankruptcy case. The debtor does not need to sell all of his or her assets, however. Debtors do not need to sell exempt property in order to repair debts. The following types of assets are usually exempt:
- Motor vehicles, up to a certain amount of value
- Household appliances
- Reasonably necessary household furnishings and goods
- Reasonably necessary clothing
- Pension payments
- A portion of the debtor’s home equity
- Damages awarded to the debtor in a personal injury lawsuit
- Public assistance or welfare benefits such as Social Security payments and unemployment compensation
- Up to a certain amount of jewelry
The following property is usually not exempt in a Chapter 7 bankruptcy proceeding and is subject to liquidation for the repayment of debts:
- A second or third vacation home
- A second motor vehicle
- Expensive musical instruments, unless the debtor uses them for gainful employment
- Family heirlooms
- Stamp, coin, and other valuable collections
- Cash, stocks, bonds, and other investments
Who is Eligible for Chapter 13 Bankruptcy?
A Chapter 13 bankruptcy is also called a “wage earner’s plan.” This type of bankruptcy allows debtors to pay off all or part of his or her debts over time. The benefit of filing for Chapter 13 bankruptcy is that the debtor will be able to keep his or her property at the end of the process. In Chapter 7 bankruptcy, the debtor must liquidate or sell all of his or her property to pay off debts. Typically, the Chapter 13 bankruptcy process takes between three and five years.
Who is Eligible for a Chapter 13 Bankruptcy?
Debtors who have a regular income are eligible for a Chapter 13 bankruptcy. Unlike a Chapter 11 bankruptcy, the debtor’s income level is not a barrier to eligibility. Self-employed individuals or individuals who operate an unincorporated business are eligible for Chapter 13 bankruptcy. When filing for Chapter 13 bankruptcy in Alabama, the debtor must file a plan with the court. During the process, the debtor will make fixed payments to the bankruptcy trustee on a biweekly or monthly basis.
How Long Does a Chapter 13 Bankruptcy Process Usually Last?
When the debtor’s current monthly income is less than Alabama’s applicable state median income, the plan will usually be for three years. Alabama bankruptcy courts may grant a long time from when the debtor can show cause. For debtors whose income is greater than the median state income in Alabama, the process usually takes five years.
Should I File for Chapter 11 or Chapter 13 Bankruptcy?
Chapter 13 Bankruptcies give the debtor the opportunity to stop foreclosure proceedings on his or her home. Chapter 13 Bankruptcy also stops collection actions against the debtor’s property. At the end of a Chapter 13 Bankruptcy, the debtor gets to keep his or her assets. However, in order to make a Chapter 13 Bankruptcy, the debtor must be able to make the minimum monthly payments. A Chapter 7 bankruptcy may be a better option for a debtor who does not have enough of a monthly income to keep making payments.
Our Alabama Bankruptcy Lawyers can Help
If you know that you probably need to file for bankruptcy, but you are not sure where to start, our lawyers can help. After discussing your case with you, our Birmingham bankruptcy lawyers can discuss which bankruptcy option works best for your situation and your goals. Contact our law firm today to schedule your free consultation and case review.