If you come in for a free consultation, one of the things we’ll talk about is whether or not I think you should file chapter 7 or chapter 13 bankruptcy.
If you’ve just started researching the bankruptcy process, Chapter 7 and Chapter 13 are the two primary types of bankruptcy that individuals file. Other types of bankruptcy deal with businesses (Chapter 11) and family farms (Chapter 12), as well as others.
Chapter 7 bankruptcy is referred to as “liquidation” bankruptcy. In a Chapter 7, all of your dischargeable debts (debts which can be eliminated) will be discharged approximately 90 days from when your bankruptcy petition is filed. A typical Chapter 7 bankruptcy will take approximately six months, from the time your petition is filed until the time the court closes your case. Most of the work is done before the petition is even filed and the six month period allows creditors and other parties time to object to your bankruptcy, if they have any legitimate objections.
Chapter 13 bankruptcy is referred to as “reorganization” bankruptcy. Chapter 13 requires the debtor to back a certain amount of his debt, based on a formula that determines his disposable income. Chapter 13 also allows the debtor to get caught up on payments on secured debt, such as a mortgage. Finally, Chapter 13 bankruptcy will discharge more types of debts than Chapter 7. A person can be involved in a Chapter 13 case for between three and five years, depending on a variety of factors, and it will be that long before his debts are discharged.
Unfortunately, whether a person files a Chapter 7 or Chapter 13 bankruptcy is not simply a matter of him picking one or the other. A debtor must qualify for Chapter 7 bankruptcy using a two-part test based on his income. The first part of the test includes an analysis of his income (from all sources) for the last six months. His six month income, when averaged for twelve months, must not exceed the median income for his household size. The second part of the test involves an analysis of his current monthly take home income compared to his month expenses. His take home pay must not exceed his expenses by more than about $150.
If he fails either parts of this test, then he will have to complete what is called the means test for a more in-depth analysis of his income and expenses to see if he can still qualify for Chapter 7. If he fails the means test, he will have to decide between not filing, waiting to file if he expects his income to drop in the future, or filing Chapter 13.
Our objective is to get our clients through the bankruptcy process in the way that best allows them a fresh start. For most of our clients, Chapter 7 is the best option, but we can only make that determination after a thorough review of the person’s financial state of affairs.
If you are thinking about bankruptcy and have more questions, we encourage you to consider scheduling a free bankruptcy consultation with a bankruptcy attorney. During the consultation, you’ll learn more about the bankruptcy process and whether bankruptcy is your best option. If we don’t think it is, we’ll tell you. If we don’t think we’re the best law firm for your needs, we’ll tell you that as well and give the names of other attorneys that might be able to help.
