What You Can Expect In Chapter 7 or Chapter 13 Bankruptcy – Common Threads
- The Automatic Stay: Protection from your Creditors
One of the main advantages of either Chapter 7 or Chapter 13 bankruptcy is that you can get a breather from your creditors’ collection actions. This protection comes in the form of what is called the automatic stay. The automatic stay starts the moment you file your bankruptcy case.
The way to understand the automatic stay is to think of what happens without it. Say you owe $5,000 to each of 4 creditors (for a total debt of $20,000) and you only have $4,000 to pay them. Without any protection, the fastest, most aggressive creditor will get to you first and take the entire $4,000 for itself. That leaves you, and the other 3 creditors with nothing. And it rewards the aggressive creditor for, well, being aggressive.
The automatic stay forces all of the creditors to step back and stop their collection actions. If they are suing you, they have to stop. If they are calling and harassing you, they have to stop. Basically, they cannot do anything to collect any debt that you owed to them prior to when you filed for bankruptcy (with limited exceptions), unless and until they get permission from the court to do so. This includes phone calls, letters, law suits, garnishments, foreclosures, evictions, etc.
This is done to preserve what you have for the benefit of everyone and makes it possible to have an orderly process of distribution. In the above example, if we split the money equally and fairly between the 4 creditors, each will receive $1,000. None of them receive payment in full, but none will leave empty handed.
- Exemptions: What You Get to Keep
For sake of simplicity in the above example you were left holding nothing, but that is not how bankruptcy works. A fresh start is not possible if the process leaves you with nothing to start your new life after bankruptcy. So in either Chapter 7 or Chapter 13, you get to keep a certain amount of “stuff” with which to start fresh. These are called “exemptions.”
In California, the exemption statutes are quite complicated, so I will just describe the concept and you should consult a competent attorney to explain the concept in detail.
Depending on where you live, what kind of stuff you own, and how much stuff you have, you may be able to keep all or most of your property in either a Chapter 7 or Chapter 13. For a more in-depth look at how this works, please read the Chapter 7 portion of this website.
An over-simplistic example, using the facts from the preceding example, would be something like this. Suppose you had the same $4,000 you had in the earlier example. Suppose also that you owed the same 4 creditors $5,000 each. Now, say you have exemptions that would protect $3,600 of what you have. That would leave $400 available for distribution, giving each creditor $100 each if they all received equal distributions.
- Forgiveness of Dept: The Bankruptcy Discharge
Now the main goal for most people in filing for bankruptcy is to receive a forgiveness of the vast majority, if not all of their debts. The way this works in either a Chapter 7 or Chapter 13 bankruptcy is through what is called a discharge. The discharge makes certain debts uncollectible in that it makes it illegal for anyone to try and collect these debts in the future.
So whether you receive your discharge in a Chapter 7 bankruptcy, or you receive a discharge in a Chapter 13 bankruptcy, the end result is the same: The portion of debts left unpaid after the bankruptcy is completed are no longer collectible after they have been discharged.