Chapter 7 (Liquidation)
A chapter 7 bankruptcy, sometimes called a straight bankruptcy or liquidation, is the most common type of bankruptcy filing. Chapter 7 bankruptcy allows individuals to discharge or eliminate most types of debt, without making payments to creditors or the bankruptcy trustee, while retaining certain property which is exempt or protected by law. In general, Iowa law allows each individual to claim as exempt the individual’s homestead, retirement accounts, life insurance, one vehicle (up to $7,000 in equity), household goods, wedding/engagement ring, accrued wages and tax refunds, and other assets. In many cases, clients are able to keep all of their property. In those instances where certain property is not exempt, those non-exempt assets are liquidated and the proceeds distributed to creditors. Chapter 7 bankruptcy is available to individuals meeting certain income requirements – known as the means test – and who have not filed another chapter 7 bankruptcy in the last 8 years. Alimony, child support, property settlement awards, certain tax debts, and student loans (except in cases of undue hardship) are not dischargeable in a chapter 7 bankruptcy.
Chapter 13 (Reorganization)
A chapter 13 bankruptcy is in effect a repayment plan that allows an individual to reorganize their debts and pay unsecured debts according to the debtor’s ability. A typical chapter 13 plan will last for either 36 or 60 months. During that time, the debtor makes monthly payments to the chapter 13 trustee and is protected from legal action by creditors. The chapter 13 trustee is responsible for administering the chapter 13 plan, collecting the debtor’s payments, and distributing payments to creditors. It is important to note that a debtor’s monthly payment is based upon his or her monthly disposable income. In some cases, this will result in a debtor paying 100% of his or her debts. In other cases, a debtor will end up paying only a fraction of his or her debt. Upon completion of the chapter 13 plan, the debtor’s remaining debts (other than secured and certain other debts) are discharged. Chapter 13 bankruptcy is available for most individuals who do not qualify for chapter 7 bankruptcy, but it can also be an effective tool for certain individuals who do qualify for chapter 7. For example, a chapter 13 bankruptcy can allow the debtor to catch up past due mortgage payments over time without losing the home, pay tax obligations over time, and keep property that would otherwise be lost in a chapter 7 bankruptcy.