Chapter 7 vs. Chapter 13
If you are facing a financial crisis and bankruptcy is your only option you may be wondering what type of bankruptcy you should file. Chapter 7 bankruptcy and Chapter 13 bankruptcy are the two most common types of personal bankruptcies, but many people do not understand the differences and what bankruptcy may be best for them.
What is the difference between Chapter 7 bankruptcy and Chapter 13 bankruptcy?
Before 2005, when most people thought about filing bankruptcy they would consider a Chapter 7 bankruptcy. Chapter 7 Bankruptcy, which allows debtors to immediately discharge many types of debts, was the most common bankruptcy. It was easy, cheap and quick.
In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act. Suddenly thousands of bankruptcy filers found that given the new provisions of the new bankruptcy law they were no longer eligible to file Chapter 7 but were instead forced into Chapter 13 bankruptcy and would have to restructure their debt payments over a 3 to 5 year period.
When can I file Chapter 7 Bankruptcy?
Although the changes in the 2005 bankruptcy laws made it more difficult to file Chapter 7 Bankruptcy there are still many debtors that can file Chapter 7. How do you know if Chapter 7 is an option for you? The most important issue will be whether your monthly income is low enough.
For instance, if you are considering filing Chapter 7 Bankruptcy your current monthly income must be less than the median income in your state or you must be unable to repay a certain amount of your debt. For instance, if your current monthly income is above the median income in your state, and you can afford to pay $100 per month (or $6,000 over a five-year period) toward paying off your debt, you cannot file under Chapter 7 and must proceed under Chapter 13. This equation is called a “means test” and can be a bit tricky. It is calculated using your expenses, the total amount of your debt and your income. Talk to a lawyer for more information about whether you can pass the means test.
When should I file Chapter 13 Bankruptcy?
As mentioned above, if you fail the income and means test your only option will be to file Chapter 13 Bankruptcy, but there are other times when Chapter 13 bankruptcy may also be your best option. Many debtors, who have assets that they want to protect, will choose Chapter 13 bankruptcy. Why? Because Chapter 7 bankruptcy will allow for the liquidation of some of your assets which are not protected by your state’s bankruptcy exemptions.
Do I need to hire a lawyer to help me file for bankruptcy?
The last thing you probably want to do if you are broke and cannot pay your bills is to hire a bankruptcy lawyer. Not hiring a lawyer may be fine for a simple Chapter 7 bankruptcy, especially if you don’t have any assets, but a complicated Chapter 13 bankruptcy with multiple bankruptcy forms, the creation of the bankruptcy repayment plan and other detailed requirements will be more difficult to complete without legal help.
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