If you're struggling with unmanageable debt -- so much that you can barely afford to cover the minimum payments on your credit cards, or have multiple accounts that have gone into collection -- you may be wondering whether bankruptcy is your best option. Often, a Chapter 13 repayment plan may seem more appealing than a Chapter 7 discharge, particularly if you have some high-value items you don't wish to have repossessed. However, if your Chapter 13 plan fails, you may have no choice but to convert it to a Chapter 7 discharge in order to finally gain freedom from your debts. Read on to learn more about how a recent Supreme Court ruling could affect your financial standing if your Chapter 13 repayment plan is unsuccessful and you're forced to convert to a Chapter 7 bankruptcy.
What are the differences between a Chapter 13 and Chapter 7 bankruptcy?
A Chapter 13 bankruptcy is a reorganization of your debts -- similar to a business's Chapter 11 bankruptcy. When you file for Chapter 13, you'll need to provide the bankruptcy trustee with a detailed statement of assets and debts. The trustee will run a credit report and investigate other debts to ensure that everything for which you are legally responsible is covered in the bankruptcy filing, and will then require you to turn over a substantial portion of your monthly income. The trustee will use these funds to pay your creditors in order of priority. At the end of your Chapter 13 repayment plan, most of your debts should be paid off or current, and others may be discharged.
If you have a decrease in income during your Chapter 13 repayment plan or are otherwise unable to make the monthly payments required to keep your accounts current, you'll generally need to convert to a Chapter 7 bankruptcy. This bankruptcy will discharge unsecured debts and allow you to either reaffirm secured debts and continue to make regular payments or give up the asset securing the debt (like your home or car). Like a successful Chapter 13 bankruptcy, a Chapter 7 bankruptcy can give you a fresh start, free from debt.
What effect will the recent U.S. Supreme Court decision have on Chapter 13 conversions?
Depending upon your income, the amount you're required to pay the bankruptcy trustee each month, and the frequency with which the trustee disburses these payments to your various creditors, at any given time, the bankruptcy court may have possession of thousands or even tens of thousands of dollars you've repaid toward your debts. However, if a Chapter 13 bankruptcy failed before these funds were disbursed, the bankruptcy court would often keep these funds and dole them out to creditors rather than return them to the debtor. This would sometimes happen even if the creditors would have had no right to repayment under the Chapter 7 plan and funds were transferred after the conversion took place.
In response to conflicting schools of thought on this issue, the U.S. Supreme Court held that funds held by a bankruptcy trustee at the time a Chapter 13 is converted to a Chapter 7 should be given back to the debtor as rightful owner. This could present a tremendous advantage to cash-strapped debtors whose Chapter 13 cases failed due to a job loss or other major financial setback.
This decision could provide you with the safety net you need to file a Chapter 13 bankruptcy, as you'll ensure that you receive a return of all the funds to which you're entitled even if you aren't successful at repaying your debts through the bankruptcy court.
For more information, contact a lawyer like Richard S. Ross - Bankruptcy Attorney.