There are two types of bankruptcy filings that consumers can generally consider. These are governed by Chapter 7 and Chapter 13 of the bankruptcy code. In this blog, we will compare the two so that you can get a sense of which one may be right for you.
CHAPTER 7 - LIQUIDATION
The bankruptcy filer's preferred choice is the Chapter 7 bankruptcy filing. In this bankruptcy, the debtor is able to discharge (cancel) all eligible debts. In order for the debtor (the person filing) must qualify under certain rules. As an experienced bankruptcy attorney, prior to filing, we can go through those qualifications, but the most important is satisfying the means test requirements. These requirements are based on establishing that your expenses exceed your income - essentially making you insolvent. If you satisfy these means tests requirements, then there is no presumption that you have abused the bankruptcy code, and your filing will be permitted.
The means test isn't the only requirement, but it is the most important. Under Chapter 7, you may keep some of your assets, and in some cases, all of your assets, provided they meet the exemption criteria in New York. This could include an interest in the home, as long as that interest is below about $180,000 in equity. (This varies from county to county, so your exemption may be different if you live in Nassau County, than someone else who lives in Brooklyn.)
The main difference between a Chapter 7 bankruptcy and a Chapter 13 bankruptcy is that you don't have to pay anything back. Once your creditors' meeting is done, and you have satisfied all the other requirements, you're done. No more debts.
CHAPTER 13 - THE REPAYMENT BANKRUPTCY
Filing a Chapter 13 bankruptcy, although requiring you to pay back some of your debts over a period of 3 - 5 years, may still serve many purposes and satisfy many requirements.
First of all, a debtor struggling in debt, but also in possession of assets, may have no choice but to opt for the Chapter 13 bankruptcy - provided their income exceeds their expenses. This calculation is made without including your debts, so, basically, if your monthly income is $5,000 per month, and it costs you $4,500 per month to meet your household expenses, food, etc., then that $500 will be used to qualify you for the right to repay a portion of your debts.
So why choose a Chapter 13 bankruptcy? Well, for starters, sometimes there is no choice. If your income is too high, and you need to protect your assets, then Chapter 13 is your only option. Secondly, If you have significant debts, you can still discharge a substantial portion of them by using only the excess income after you pay your average monthly expenses. So, in the example above, if your net income is $500 per month, then you can use that money to pay back your debts, over a period of three years. That is a total of $18,000, to pay off your debts. Depending on the type of debt, if you have say, $50,000 in credit card debts, the other $32,000 will be wiped out. See the advantage?
A Chapter 13 bankruptcy is often the preferred choice when you have a house and are facing a foreclosure, or you have a significant tax debt.
SO WHICH BANKRUPTCY OPTION IS RIGHT FOR ME?
When we meet with our potential clients, we discuss their situation, and what it is they are looking to achieve. If there are ways we can plan a bankruptcy filing, then we help take those steps, with a goal of filing a Chapter 7 bankruptcy. But when there really is no alternative, a Chapter 13 bankruptcy can be a good alternative to foreclosure, repossession and garnishment. To learn more about the differences, and to decide which bankruptcy filing is right for you, contact us.
For additional information about how to repair your credit, click here.