Often, clients come to the office and start with a strong opinion one way or another – either they absolutely do not want to file bankruptcy or they absolutely want to file bankruptcy because they see that as their only option. What they usually do not know is that there are different kinds of bankruptcy and that each individual’s circumstances change the analysis for what is best for them. Therefore, being informed on these issues is important so you can make the right decision for you and your family.
Chapter 7 Bankruptcy
Chapter 7 Bankruptcy is also known as a “Fresh Start Bankruptcy.” If you qualify for Chapter 7, you can put almost all of your debt into the bankruptcy and owe nothing upon discharge. In most cases, Chapter 7 is the most economical way out of debt as you usually pay your bankruptcy attorney no more than $2,000 and you are completely debt free in 6-9 months.
However, in order to qualify to have all of your debt discharged, you have to meet certain maximum income requirements for different family sizes, which are different for each state. Typically, these income maximums are quite low and most people that have enough debt to truly make bankruptcy worth a discussion make more than the guidelines allow. There are situations where you can qualify for a Chapter 7 bankruptcy if you make more than the maximum for your family size; however, you will need to show that your expendable income, based on a legitimate hardship, is extremely low or non-existent. This calculation is done through the “means test.” An experienced bankruptcy attorney can help you calculate this or you can get a decent estimate of your viability under this test through calculators online.
Also, you have to be aware of the exemptions in your state and how that affects your assets. For instance, in Arizona there is a $6,000 equity exemption for a vehicle. Therefore, if you have a paid-off vehicle that is worth more than $6,000 after all interest holders are paid, than the bankruptcy trustee may take the vehicle to sell for funds to pay themselves and your creditors. There are exemptions for your home, jewelry, tools of trade, etc. These all need to be taken into consideration before deciding if Chapter 7 Bankruptcy is right for you.
Chapter 13 Bankruptcy
An alternative to Chapter 7 bankruptcy is Chapter 13 bankruptcy which is usually reserved for those that make too much money to qualify for Chapter 7 and/or for those that have assets (investment property, collectibles, stocks, etc.) that they would lose if they filed a Chapter 7.
Under a Chapter 13, unlike a Chapter 7, you do have to pay back a portion or all of your debt to your creditors over a 3 to 5 year period. Your bankruptcy attorney will propose a plan to the Bankruptcy Trustee based on your income and assets and the Trustee will review the plan and hopefully confirm the plan. The good news is that once the 3 to 5 year plan is done, whatever is still owed to your creditors is discharged. The bad news is that your plan can be re-evaluated by the Courts each year so that if you make more money, you pay more money to the trustee. You basically have no incentive to better your financial situation whilst the bankruptcy plan is in effect. This means in the beginning of the plan it can appear that you will only pay back 20% of what you owe by the end of the plan, but a change in income can mean that you will end up paying back 100% of what you owe. This is different from a Chapter 7 bankruptcy in that once you file, you can win the lottery and it will not change the bankruptcy.
One benefit of a Chapter 13 plan is that secondary mortgages may be able to be removed if your home is under water. This is called a “lien strip”. This is large benefit of a Chapter 13 that may cause debtors to file a Chapter 13 versus pursuing a debt settlement.
Regardless of which plan you choose, make sure that you have met with an experienced attorney as well as do your own due diligence into your options so that you can make the best decision that will help you reach your financial goals. As part of our free initial consultation, we work with a client to determine their best option. If it’s bankruptcy, then we recommend a good bankruptcy attorney to the client. We always want what’s best for our clients, not necessarily what might be best for us.
Kevin Fallon McCarthy
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