Chapter 7 vs. Chapter 13 Bankruptcy- Which is Best for You?
I will explain the general differences between Chapter 7 and Chapter 13 Bankruptcy, what type of Debt Relief each Provides, and Who is Eligible to file each kind of Bankruptcy case.
Chapter 7 Bankruptcy - Eliminates Debts- Do you Qualify?Chapter 7 Bankruptcy is sometimes referred to as "Straight Bankruptcy". This is what most people need. You file a Petition to eliminate all of your debts. You have to list every debt you owe to every company or person.
You also have to tell the court everything you own, including houses, cars, vacant land, bank account balances, and other valuable things you own. The reason you have to disclose everything you own, is because, you are allowed to keep your belongings, as long as it is not over the amount you are allowed to protect. The amount you are allowed to protect is called, exempt property. That varies by state. For example, in Illinois, you are allowed to protect $15000.00 equity in your house, $2400.00 worth of a car, and $4000.00 worth of everything else. These are the common exemptions. There are others, and you need to consult with an experienced bankruptcy lawyer to discuss how they apply to your situation. If you own more than you are allowed to protect, you might need to file Chapter 13 Bankruptcy to protect your things.
Chapter 7 Bankruptcy, in turn, eliminates debts such as credit card, medical, some taxes and utility bills. It does not eliminate certain taxes, child support, or student loan debt.
How do you qualify for Chapter 7 Bankruptcy? You have to pass the "Means Test". This test says that if you make under a certain amount of money for your size family, you can file Chapter 7. If you make more than the state median, then we have to go further, and you get certain allowances, and after the full test, you might or might not qualify.
If you own too much property or make too much money, you will then have to consider Chapter 13 Bankruptcy to reorganize your debts over 3 to 5 years.
Chapter 13 Bankruptcy- Reorganizes Debts and Saves Houses and CarsChapter 13 Bankruptcy is a court-supervised reorganization of your debts. Most people who file Chapter 13 Bankruptcy are behind in house or car payments and want to save the house or car. Two things determine how much your payment in the Chapter 13 Plan will be.
First, is the "Means Test". After taking your last 6 months average from your pay stubs, then deducting your expenses such as taxes and insurance and car payments, the number that is left tells the court how much you have to pay on your unsecured (credit card and medical) debt. This is a very complicated process, much like doing a tax return.
The second way your payment is determined is based on how much stuff you own that is beyond what you can protect. You have to pay at least as much as the amount of property you can't protect. So if you have $10,000.00 worth of unprotected equity in your house, you have to pay at least $10,000.00 to your creditors over 3 to 5 years.
The attorney develops a Chapter 13 Plan, and it tells your creditors how much they will be paid, in what order, and when. Bill collectors cannot contact you or sue you or garnish your wages during the plan, except for Child Support payments.
Which is best for YOU? Chapter 7 or Chapter 13?When you meet with an experienced Bankruptcy Attorney, he or she will review your whole financial situation. What you own, who you owe, and what your goals are. Then we can start to determine whether Chapter 7, Debt Elimination, or Chapter 13, Debt Reorganization, is best for you. In many cases, we have to do the "Means Test" to determine which type of bankruptcy you qualify for. The most important thing to remember is that at the end of your meeting with an attorney, you should know a bit about each type of bankruptcy, how each would affect you, and whether you'll qualify or not.
Generally, if you own too much stuff or make too much money, you can't file Chapter 7 and get full debt relief. Rather, you'll probably have to file Chapter 13 and pay back at least part of your bills back. The Devil is in the Details, so it's important that you understand everything before you decide with your attorney which type of Bankruptcy Relief is best for you.