Can I Avoid Bankruptcy?
Weighing the Pros and Cons of Chapter 7 Bankruptcy vs. Chapter 13
If you are considering filing bankruptcy, you may be wondering which chapter you would file under and why, or what are the ways to avoid bankruptcy all together – or if bankruptcy is even appropriate for your situation. Like the decision of whether to file at all, the decision of whether to file chapter 7 or chapter 13 should be an informed one.
There are some very important differences between the two types: who qualifies, effects on debt and effects on home and vehicles. We will elaborate on the different qualification requirements, but for now, here is a good chart describing generally the many differences between filing chapter 7 and chapter 13.
| Chapter 7 | Chapter 13 | |
| Is credit counseling required? | Yes | Yes |
| Who qualifies? | Debtors must pass the “means test” among other criteria in order to qualify | Must have debts less than a certain amount set by law and adjusted periodically, currently $360,475 in unsecured debts and $1,081,400 in secured debts
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| How will it affect my debt? | With some exceptions (i.e. student loans, taxes), the majority of debts are extinguished upon conclusion of bankruptcy.
| Debt is paid off over a period of time under a court-approved payment plan, which can last up to 5 years. |
| How will it affect my home? | May be able to keep home under homestead exemption, provided debtor remains current on mortgage payments and doesn’t have substantial non-exempt equity.
| May be able to keep home so long as debtor faithfully sticks to payment plan and doesn’t have any substantial non-exempt equity. |
| How will it affect my vehicle(s)? | Depends. Limitations vary by state. California & Arizona restrict the amount of “equity” you have in your car to a very low amount. You may be forced to liquidate your car and/or return it to the lender.
| Most debtors can keep their vehicles, but must be able to make payments under the payment plan over 3-5 years. |
| How will it affect my non-exempt assets? | All non-exempt assets are liquidated or auctioned off to pay creditors. | Can keep most assets, so long as debtor sticks to payment plan. If debtor falls behind in payment plan, assets could be liquidated.
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| How much time will I have to repay my debt? | N/A | Typically three to five years. |
| What will the payments on my remaining debt look like? | Non-dischargeable debt, such as most student loans, child support and taxes, will still have to be paid. | “Reasonable” payments must be paid on all debts. Will vary depending on individual’s disposable income.
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| What portion of my debt will have to be repaid? | Will depend on the value of non-exempt assets surrendered to pay off debts. | In some instances, total amount of debt to be paid back may be reduced.
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| When will bankruptcy proceedings end? | Court enters discharge order. Entire process usually takes 3-6 months. | Debtor has made all payments in accordance with payment plan and court has entered discharge order. Could take up to 5 years to complete the plan.
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| What will be the affect on my credit rating? | Fact that you filed remains on credit report for up to ten years from date of filing. | Fact that you filed remains on credit report for up to ten years from date of filing. However, some credit reporting agencies will only report a Chapter 13 for seven years.
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Who qualifies for Chapter 7 Bankruptcy?
Before you waste your time doing any further research on Chapter 7, it would be helpful to know whether or not you will qualify. Under the new bankruptcy code, if your current monthly income (average income for the past six months) is higher than the median income for a family of your size in your state, you will have a hard time qualifying for Chapter 7. Since your income is higher than the median, you must pass the “means test” in order to qualify for Chapter 7. On the other hand, if your current monthly income is less than or equal to the median in your state, you will presumptively be eligible for Chapter 7.
The Bankruptcy “Means Test”
The “means test” looks to a person’s disposable income to determine whether or not the individual would be able to repay a portion of their unsecured debts with Chapter 13 bankruptcy. In order to determine what your monthly disposable income is, certain “allowed” monthly expenses are subtracted from your current monthly income. An attorney will be able to tell you what specifically is allowed to be deducted, and help you determine whether or not you qualify.
Alternatives to Filing Bankruptcy
In the event that you don’t qualify for Chapter 7 bankruptcy, there are other viable options aside from filing Chapter 7 bankruptcy. An attorney negotiated debt settlement is a great way to eliminate debt and avoid bankruptcy. Debt Settlement is usually much quicker and less expensive than a Chapter 13 bankruptcy. So if you don’t qualify for Chapter 7 or don’t want to (or can’t) spend the money and time a Chapter 13 takes, not to mention the credit score impact, consider an attorney negotiated debt settlement instead.
For more information on debt settlement and to set up a free evaluation and consultation, contact the attorneys at McCarthy Law today.