Reaching the realization that bankruptcy is necessary can be a humbling experience. Individuals who find that they cannot consistently fulfill all of their financial obligations may choose to file for bankruptcy. Others may need to make a quick determination about bankruptcy because a creditor serves them with a lawsuit or they find themselves at risk of losing critical assets.
There are many different types of bankruptcy available. Most individuals and couples considering bankruptcy choose either Chapter 7 or Chapter 13 bankruptcy. How can people determine which option is better for them?
Chapter 7 bankruptcy helps those with below-average income
One of the most important criteria for a Chapter 7 bankruptcy is the obligation to pass a means test. People calculate their current annual income based on their last six months of wages. They adjust their income level by deducting certain expenses. They then compare that adjusted income to the current state median income for a household the same size as theirs.
Those who passed the means test may be eligible for Chapter 7 bankruptcy. However, not everyone who qualifies for Chapter 7 bankruptcy chooses a Chapter 7 filing. Asset liquidation is sometimes necessary during Chapter 7 bankruptcy. People can exempt certain resources, including a specific amount of home equity and retirement savings. Reviewing personal holdings can help people determine whether Chapter 7 bankruptcy makes sense given their current debt levels and holdings.
Chapter 13 is a longer process
When people select Chapter 7 bankruptcy, they can potentially discharge their eligible debts within a matter of months. The process is relatively straightforward, and many people can discharge their debts without liquidating any of their property.
People can qualify for Chapter 13 bankruptcy even when they earn competitive wages. There is no means test that they need to pass. They also have no reason to worry about the liquidation of their assets. Instead, they have to negotiate a repayment plan with their creditors and a court-appointed trustee.
The repayment plan may include debts that are eligible for discharge and even secured debts such as mortgages. The filer makes a series of payments to the courts for between three and five years. They can then discharge the remaining balance due on their eligible debts. Chapter 13 bankruptcy is an excellent option for small business owners, successful professionals and others who worry about the potential loss of property in a Chapter 7 bankruptcy.
An individual’s current circumstances and future plans, as well as the types of debt that they carry, can have a direct impact on the best option when choosing the type of bankruptcy to pursue. Reviewing personal finances with a lawyer familiar with bankruptcy cases can help people navigate the bankruptcy process and make the best possible decisions given their personal circumstances.
