What type of bankruptcy should I file?




You need to understand the benefits of each chapter, given your financial situation and your goals.


The decision of file for bankruptcy involves several small decisions, including whether Chapter 7 or Chapter 13 would be the most beneficial given your particular situation. In many cases, this is a decision that is not up to the potential registrant. However, there are situations where someone who otherwise qualifies for Chapter 7 would opt for a Chapter 13 case.

Chapter 7 Bankruptcy

The most popular type of bankruptcy is a Chapter 7 Case. These legal proceedings are relatively quick and result in the elimination of an individual’s unsecured, non-priority debt. Unfortunately, a debtor must financially qualify for Chapter 7. Because a Chapter 7 case is designed for someone with limited resources and income, this is not an option available to every debtor.

There are two hurdles that a potential Chapter 7 registrant must overcome. The first is the “resource test”. This calculation is used to determine your current monthly income. If your income is below the median average for your geographic area, you are eligible to file a Chapter 7. If it is above the median income, you may still be eligible. A number of allowable deductions and expenses will be subtracted from your household income, including employment taxes, payments to secured creditors, and food and shelter allowances to determine if you qualify.

The other second hurdle is the amount of non-exempt property a debtor owns. Chapter 7 is also called “liquidation” bankruptcy because you may be required to turn over your assets to a court-appointed trustee. The trustee would then sell the property and pay the proceeds to your creditors. Fortunately, there are state and federal exemptions available to protect your property. Depending on the jurisdiction where you are filing, you will use either your state’s exemptions or the federal exemptions. These protections allow you to keep your property. However, if you own a non-exempt asset, it will need to be sold. In this situation, it might be more beneficial to file Chapter 13.

Chapter 13 Bankruptcy

When an individual or couple files a Chapter 13 case, they attempt to reorganize their financial obligations. Through Chapter 13, you can pay off part of your debt while paying off other debts.

The key element in a Chapter 13 case is the bankruptcy plan. This payment plan over three to five years is proposed by a debtor and will include its intentions vis-à-vis its various creditors. For example, a Chapter 13 plan might state that a debtor will pay its mortgage arrears, past due federal taxes, and a pro-rated amount to its unsecured creditors. Although this process is not a negotiation with the creditors, the plan must comply with the Bankruptcy Code. A creditor has the right to object to the plan if they fail to comply with the code or properly process their claim.

Factors determining which chapter of bankruptcy is the most advantageous

As noted above, a filer may not have the ability to decide which chapter of bankruptcy to file. In most situations, Chapter 7 may be the best option because it is faster and does not require you to pay off your creditors. However, there are often other factors that influence a registrant’s decision.

Type of debt

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Not all debt is created the same. If the bulk of your unpaid debt is unsecured credit card bills or medical bills, Chapter 7 makes sense. An eligible filer could eliminate all of their debts in as little as five months. However, there are other types of financial obligations.

Mortgage foreclosures are common. When a homeowner falls behind in their payments, a lender has the right to foreclose on the property. By filing a Chapter 13 dossier, a filer will be allowed to repay the money he has lost over five years. If you’ve fallen behind on your mortgage payments due to a temporary job loss or other financial crisis, Chapter 13 might be the best option for keeping your home. There is no mechanism to catch up on secure payments in a Chapter 7 case.

Non-exempt equity

As noted above, you might own non-exempt property that you want to keep. For example, you could have $ 15,000 of non-exempt equity in your home and $ 60,000 of unsecured credit card debt. Under these circumstances, you probably don’t want to sell your house to pay off some of your debt. Therefore, you can choose to file a Chapter 13 case and pay your creditors $ 15,000 over five years. Based on these current facts, the remaining $ 35,000 in debt would be discharged. In many cases, a debtor pays less than what they would pay if they attempted to negotiate directly with their creditors.

other considerations

There are other considerations when deciding which chapter of bankruptcy to file that only apply in specific situations. One advantage in a Chapter 13 case that is not available in Chapter 7 is the ability to strip a second mortgage. In certain circumstances, a Chapter 13 debtor could reclassify a second mortgage as unsecured debt and meet its financial obligation. It is important to note that this is rare and requires the house to be worth less than the first mortgage.

Another benefit found in Chapter 13 is the ability to “reduce” a car payment. If you bought a car 910 days before filing, you may be able to reduce car payments. When a vehicle is worth less than what is owed, a Chapter 13 debtor might offer to pay off the car’s fair market value through bankruptcy, freeing up any remaining balance.

Filing for bankruptcy should be a thoughtful decision

You should never file for bankruptcy without weighing the pros and cons. In addition, you need to understand the benefits that each chapter offers, given your financial situation and your goals. Most people who file for bankruptcy will have no choice but to what type of file they file – their circumstances will dictate their decision. However, there are cases where ranking one chapter over another makes more sense. It is also crucial to consult a bankrupt lawyer in your state.



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