There is a lot to know before you make a decision about any type of bankruptcy filing. The two most common bankruptcy filings are Chapter 7 and Chapter 13, with Chapter 7 being the option chosen the most.1 The most basic difference between the two types of filings is that in a Chapter 7 bankruptcy filing, also known as a liquidation, you can clear some or all of your debt through the sale of your assets, including your home and cash.
A bankruptcy law firm can provide sound advice so that you choose the best debt relief option for your situation.
A Chapter 13 filing allows you to keep your assets, but you have to repay your debt while adhering to a three- to five-year repayment plan. Neither option lets you eliminate child support, alimony or certain tax debts.2 Student loan debt and fines imposed for criminal activity are also not discharged by filing for bankruptcy.3
Qualifying for Bankruptcy
Those who file for Chapter 7 bankruptcy generally don’t have a lot of assets or earned income. If they do have sufficient income to pay off at least some of their debt, the courts will require them to file Chapter 13 instead. A means test is used to determine if a person’s income is low enough to allow them to file for Chapter 7 bankruptcy protection. The means test only applies to those filing because of consumer debts. It does not apply for those filing because of business debts.
With the means test you have to determine your current monthly income by averaging your income each month over the past six months and comparing it to the median income for the same size household in the state in which you live.4 The median income by state can be found by going to the U.S. Trustee Program at the Department of Justice website.5 Once you locate the median income for your state and family size, you would divide that by 12 to get the monthly income. If your monthly income doesn’t exceed that amount, you have passed the means test to qualify for Chapter 7 bankruptcy protection. If you are married, you can file either a joint petition or individual petitions.
No matter whether you file for Chapter 7 or Chapter 13 bankruptcy protection, you are required by law to obtain credit counseling from an agency approved by the U.S. Trustee’s office within the 180-day period before filing for bankruptcy. This credit counseling will help determine whether it is possible for you to manage your debt without having to file for bankruptcy protection.
In a Chapter 7 bankruptcy filing you will need to provide the following: 1) a list of all creditors and the amount and nature of their claims; 2) the source, amount and frequency of your income; 3) a list of all your property; and, 4) a detailed list of your monthly living expenses such as food, clothing, shelter, utilities, taxes, transportation, medicine costs, etc.6 Other paperwork, like tax returns, will also be required.
If your debt is primarily consumer debt, you will have to file a certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling; evidence of payment from employers, if any, received 60 days before filing; a statement of monthly net income and any anticipated increase in income or expenses after filing; and a record of any interest you have in federal or state qualified education or tuition accounts.7
Assigned a Bankruptcy Trustee
A bankruptcy trustee will examine your assets and categorize them as exempt or non-exempt. The exempt assets cannot be sold to pay your debts. While exempt assets vary depending on the state in which you live, they generally include most personal items such as household furnishings, clothes, a car (up to a certain value), general items you need for daily life and some retirement assets. Roth and traditional individual retirement accounts are generally exempt up to $1M, but how retirement assets are treated varies by state. If you have a substantial retirement account it is best to check with a bankruptcy attorney prior to filing for bankruptcy. Items that are considered non-exempt include stocks, bonds, savings accounts, valuable collections of art, electronics, a second car or a second home. These items will be sold by the trustee in order to pay off your debts.
Your home can be sold by the trustee to pay off your debt if you have equity in your home. There is a homestead exemption in many states that allows you to keep a portion of your equity as part of your exempt assets. This homestead exemption should not be confused with the amount of equity you actually have in your home, but rather it is a fixed amount of money determined by your state. If you have little equity in your home it usually doesn’t make sense for the trustee to sell your home, because there would be no money available to settle your debts. Mortgage companies prefer that you reaffirm your debt and keep your home, rather than having the home go into foreclosure.
What Happens to Your Credit?
A Chapter 7 bankruptcy will stay on your credit report for up to 10 years from the date you file, making it difficult to secure credit and costing you more in higher interest if you do secure credit. The Chapter 7 process will usually take about 100 days from start to finish, with additional time needed to complete the credit counseling requirements. Once you file for bankruptcy some creditors will be temporarily restricted from contacting you; collecting money from you; continuing wage garnishment; or starting or continuing lawsuits against you or your property. Once your bankruptcy is complete you will have the money that you were paying toward loans or credit cards to pay for household necessities.
Filing for bankruptcy, and which type of bankruptcy is best for you, is complicated. It is best to seek the advice of a bankruptcy attorney who can provide professional advice on your particular situation. Don’t wait until after filing to enlist an attorney’s help. Do it as soon as you start contemplating bankruptcy as an option and the attorney will be in the best position to help you.
Hines Law is a Massachusetts Bankruptcy Firm ready to safeguard your interests and help rebuild your future. Our bankruptcy attorneys have the knowledge and experience to expedite your case with 20 years’ experience in debt solutions. If you are drowning in debt and overwhelmed with your finances, bankruptcy may be an option for you. Call us today for a Free Consultation!