Chapter 7 bankruptcy is commonly known as a liquidating bankruptcy or straight bankruptcy and usually lasts about 4 to 6 months. The filing of a Chapter 7 bankruptcy petition creates an estate comprised of all assets owned by the Debtor. Nonetheless, the Debtor retains the right to exempt certain assets from the bankruptcy estate and shield them from the bankruptcy process and possible sale by a trustee. In most cases the Chapter 7 Debtor will be able to exempt all of his/her assets under applicable Michigan or Federal Bankruptcy laws. However, if there remain certain assets that do not qualify for an exemption, the Chapter 7 bankruptcy trustee will sell those non-exempt assets. The proceeds from the sale of those non-exempt assets are then distributed amongst the Debtor’s creditors.

The objective or goal of a Chapter 7 bankruptcy is to provide the honest Debtor with a fresh start. This objective, under Chapter 7 of the Bankruptcy Code, is accomplished by granting the Debtor a discharge in exchange for the sale of all non-exempt assets as discussed above. This bankruptcy discharge relieves the Debtor from any obligations due and owing his/her unsecured creditors (exceptions are noted below). In other words, upon successful completion of a Chapter 7 bankruptcy case, the Debtor will no longer be legally obligated to pay any: (1) credit card debts; (2) medical bills; (3) any monies due and owing any secured creditor resulting from the repossession or surrender of the secured creditor’s collateral (i.e. a car, boat, or real property); and (4) personal loans to friends and/or family members. While technically, a Chapter 7 Debtor is also discharged from having to repay any secured obligations (a car loan and home mortgage being the most common), the secured creditor retains the right to repossess or foreclose upon those assets in the event of non-payment. As such, if there are certain assets which a Debtor wishes to retain and which are the subject of a secured loan, the Debtor must continue to make payments to that creditor even after the discharge.

A bankruptcy discharge under Chapter 7 is not, however, without limitations. The Chapter 7 bankruptcy discharge does not eliminate debts for most taxes, student loans, family support obligations or debts from fraud, intentional injuries or damages for driving under the influence of drugs or alcohol.

A Chapter 13 bankruptcy petition requires the Debtor to formulate a plan of reorganization under which the Debtor proposes to re-pay his/her Creditors all or a portion of the debt owed to them over a period of three to five years. In so doing, the honest Debtor is entitled to retain all assets, exempt or otherwise. The Chapter 13 Bankruptcy Plan requires the Debtor to make monthly plan payments to a bankruptcy trustee for the duration of the plan. The bankruptcy trustee, in turn, distributes those plan payments amongst all of the Debtor’s creditors pursuant to the terms of the Chapter 13 Bankruptcy Plan. The Chapter 13 plan payment is intended to address the obligations of the Debtor’s: (1) unsecured creditors, (2) tax obligations; (3) arrearage on secured assets the Debtor wishes to retain; and (4) vehicle loans or other forms of short term secured debt. Note that in most cases long-term secured liabilities like a mortgage, will be paid outside of the plan.

The amount of the Chapter 13 Bankruptcy Plan payment is the difference between the Debtor’s income and the Debtor’s monthly expenses (those expenses reasonably necessary for the support of the Debtor and the Debtor’s dependents). This difference constitutes the Debtor’s surplus income.

There are many options available to a Chapter 13 Debtor that are not available to a Chapter 7 Debtor. For example if a Debtor is behind on his/her mortgage payment, those arrears can be cured within the Chapter 13 Plan thereby permitting the Debtor to keep the home. In addition, many secured claims need only be paid to the extent of the value of the property securing the claim (home mortgages have special rules in this regard). Lastly, Chapter 13 is an ideal vehicle for paying off back taxes and preventing any further IRS levies or garnishments.

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The Michigan Bankruptcy Law Office of Walter Metzen, offers each prospective client a free initial consultation to discuss your financial concerns as well as the possible need to file a petition for relief under the United State Bankruptcy Code. The purpose of the initial consultation is to inform you about the bankruptcy process in Michigan, whether you should file a Chapter 7 or a Chapter 13 and how the United States Bankruptcy Code is designed to protect most if not all of your assets through exemptions.  In an effort to make the free consultation more productive, we ask that you bring certain financial information to the meeting, or better yet, complete and send the online Michigan Bankruptcy Consultation Form.

The list of creditors must be complete. It must include ALL of your creditors (including family members, taxes, car loans, mortgages and leases), in one column and the amount owed in the adjacent column. The monthly budget should contain a complete breakdown of your income and expenses.

In addition to the above, be prepared to provide our office with dollar values for certain assets, including your home (if you own), your vehicles, and any other substantial assets, whether real property or personal property. By providing us the opportunity to review your monthly budget and to gain some understanding of the value of your assets and how much you owe to your creditors, we will be better able to assess your situation and advise you appropriately. You may schedule an appointment by either completing the Michigan Bankruptcy Consultation Form, calling our offices directly at (313) 962-4656 or by requesting an appointment via email.