The Arizona Republic reported that Phoenix AZ bankruptcy rates are up 82% over 2008. Chapter 7 filings account for 81% of this increase and the rest are Chapter 13 filings. This shows that the most popular consumer bankruptcy filings are chapter 7 and chapter 13. With so many in financial despair and debating whether or not to file for bankruptcy, and if so, which to file under, it is important to know the differences and benefits of each chapter. Consult with an Arizona bankruptcy lawyer for help to decide which chapter is best and how to proceed.
First, the names of the types of bankruptcies come from the chapters in which they are located in the bankruptcy code.
Chapter 7 bankruptcy is considered a liquidating bankruptcy. Under chapter 7, all non exempt assets will be liquidated by a trustee and, minus his fees, be used to pay creditors. This can seem undesirable to say the least, but under Arizona's rather generous exemption laws a debtor can keep most his property. The benefits of chapter 7 are that all non secured debt will be discharged and the debtor will exit the bankruptcy process completely debt free. Types of non secured debt are credit card debt, medical bills, and unsecured loans. Types of debt that cannot be discharged are student loans, unpaid taxes, and secured loans such as mortgage and car payments.
The chapter 13 is more suitable to someone that has some steady income, as the debt will be paid back over a period of three to five years. This restructured payment plan is submitted by the Arizona bankruptcy lawyer and approved by the courts. This allows the debtor to retain his properties. Chapter 13 has one very powerful tool called the cram-down. In chapter 13 cram down cases, the code permits the modification of secured debts owed to creditors. It works like this. If, for example, my car is worth only 5,000 dollars, but I owe 10,000 on it, under the chapter 13 case I will only have to pay what it's worth, 5,000 dollars. The rest will be discharged, so the debt is "crammed down."
The catch with the cram down is that it can only be used on cars that have been purchased more than two and a half years before filing. Also the cram down cannot be used on primary residencies. But it can be used on vacation homes, rental properties and most any other type of secured debt.