Chapter 7 or Chapter 13: What Bankruptcy Actually Does for a Maryland Household

By the time most people call a bankruptcy lawyer, they've been losing sleep for a long while. Calls from collectors, a wage garnishment notice, a car that's about to be repossessed, a mortgage that's slipping. Bankruptcy is one of the few legal tools designed to stop that pressure and give a household a way to start over. It isn't right for everyone, but it is far less mysterious than it sounds.

Where bankruptcy happens

Bankruptcy is handled in federal court. For Maryland residents that means the U.S. Bankruptcy Court for the District of Maryland, which has a courthouse in Baltimore. Your case is overseen by a judge, but the person you will deal with most is a trustee, an official appointed to review your finances and make sure the process is followed. Most filers never see a courtroom the way they imagine it.

The automatic stay

The moment a bankruptcy case is filed, a federal protection called the automatic stay generally takes effect. Creditors have to stop most collection efforts: phone calls, lawsuits, garnishments and many repossessions and foreclosure steps. There are exceptions, and a creditor can ask the court to lift the stay, but this breathing room is often the first real relief clients feel.

Chapter 7: the fresh start

Chapter 7 is often called liquidation. You list your debts and your property. Anything the law protects, which the bankruptcy code calls exempt, stays with you. Exemptions commonly cover things like a reasonable amount of equity in a home, a vehicle, household goods, tools of your trade and retirement accounts, though the specifics depend on the rules that apply to you. If there is property that isn't protected, the trustee may sell it to pay creditors. Many Chapter 7 cases are "no asset" cases, meaning there is nothing to sell.

At the end, the court issues a discharge. A discharge is a court order that releases you from personal responsibility for most unsecured debts, such as credit cards, medical bills and personal loans. It means creditors can no longer try to collect those debts from you. Some debts survive, including most child support, alimony, many tax debts and most student loans. Secured debts like a mortgage or car loan work differently: the discharge removes your personal liability, but the lender's lien on the property remains unless you keep paying or give the property back.

Chapter 7 isn't open to everyone. The law applies a test comparing your household income to the standard for Maryland to decide whether the filing is appropriate, and your attorney will run that analysis before recommending anything.

Chapter 13: the repayment plan

Chapter 13 is a reorganization. Instead of wiping debts out quickly, you propose a plan to repay a portion of what you owe, based on your income, over a period of years set by the plan. During that time you make a single monthly payment to the trustee, who distributes it to your creditors. When the plan is completed, remaining eligible debts are discharged.

People generally choose Chapter 13 for particular reasons.

• You are behind on a mortgage and want to stop a foreclosure and catch up over time
• You have valuable property you want to protect that might be at risk in Chapter 7
• Your income is steady but too high for Chapter 7, or you have debts that would not be discharged in Chapter 7 and want time to pay them
• You need to deal with a car loan or tax debt on a payment schedule

The tradeoff is commitment. A Chapter 13 plan asks for discipline over several years, and a plan that fails because payments were missed can end with the case dismissed. That's why the plan has to be built on a realistic budget, not an optimistic one.

The meeting of creditors

A few weeks after filing, you attend what's formally called the meeting of creditors. The trustee presides. You are placed under oath and asked questions about your paperwork: your income, your property, recent transfers, whether everything on your schedules is accurate. Creditors may attend, but they rarely do. The meeting is usually short, and with a lawyer who has prepared you, it is far less intimidating than people expect. Honesty and complete paperwork matter more here than anything else.

Before and after you file

Federal law requires a credit counseling course before you file and a financial management course before your discharge. You will gather pay records, tax returns, bank statements and a full list of what you own and owe. Leaving something off is a serious mistake, even by accident, which is another reason to have an attorney review it. Strict deadlines apply at several points in a case, and a missed one can cost you protection, so call early rather than late.

Bankruptcy does affect your credit for a time, but many people find that being free of the weight of unpayable debt lets them begin rebuilding sooner than they would have while drowning in it.

Cooper & Tuerk, LLP represents Maryland clients in bankruptcy, and you'll work directly with an attorney from your first conversation. If you're wondering which chapter fits your situation, or whether bankruptcy fits at all, call the office at (410) 539-0300. This article is a general overview, not legal advice.