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Chapter 7 bankruptcy filing eliminates credit card debt

For consumers, there are two kinds of bankruptcy filings. The first type that you may file in Michigan or any other federal bankruptcy district is called Chapter 7. It's sometimes referred to as the liquidation chapter or a 'straight' bankruptcy. The other kind for consumers is Chapter 13, which is known as a remedy for reorganization of debts.

Chapter 13 allows for a payment plan in monthly installments for a three to five-year term. Chapter 13 is often used for an individual or married couple to keep the residential home when the mortgage is in arrears. They can make payments to get the mortgage back on a current basis.

At the same time, however, Chapter 13 allows for the wipeout of large amounts of credit card and other unsecured debt. In many instances, depending on your income, you may end up paying nothing or a few cents on the dollar toward credit card debt in a Chapter 13. That amount will be determined by your counsel while reviewing your information and preparing your payment plan with you.

Chapter 7 does not contain a payment plan. It's used to erase large amounts of unsecured debt such as credit card balances. It's called liquidation on the premise that if there are any nonexempt assets, they will be liquidated to pay toward the debts listed. However, in the typical consumer filing of a Chapter 7 bankruptcy, no assets are liquidated.

That's because there are exemptions provided by law that allow a consumer to retain the basic range of possessions and furnishings possessed by most people. In a Chapter 7, you'll be able erase all of your unsecured debt. At the same time, you'll retain all of your standard furnishings and belongings.

In a Chapter 7, you can keep your home if it's paid current and if you want to continue paying your monthly mortgage payments. If you have too much equity in your home, you may have to file a Chapter 13 instead. Whether in Michigan or elsewhere, that's the kind of question that can only be determined after going over all of your financial information with an experienced bankruptcy practitioner.

Source: Santa Barbara Independent, "Liquidation or Reorganization?" Harley Hahn, May 5, 2013

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