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Deciding Whether to File Chapter 7 or Chapter 13

Various factors come into play when deciding what type of bankruptcy to file.  The entire purpose of filing bankruptcy is to wipe debts clean and restore solvency.  Because filing an inappropriate form of bankruptcy may not serve the intended purpose, it is important to carefully evaluate the types of bankruptcy.

Exempt assets

Depending on which state a debtor lives in and its property laws, assets valued at a certain amount are exempt when a debtor handles unsecured debts by filing Chapter 7 bankruptcy.  However, states vary considerably in their exemption limits.  So, it is best to discuss exempt assets with a lawyer before filing.  In general, debtors with few assets and little unsecured debt benefit the most from filing Chapter 7.

Income

With the advent of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) in 2005, income became a major eligibility factor in whether a debtor qualified for Chapter 7 bankruptcy.  The means test introduced by the BAPCPA bases income eligibility on the median income of a state’s residents.  Debtors with greater than median incomes must apply a means test, which requires other calculations regarding disposable income.  Debtors with low income usually qualify for Chapter 7.

Debtors with a steady source of income and whose income amount disqualifies them for Chapter 7 usually benefit more from filing a Chapter 13 bankruptcy.  They can devise a repayment plan, which enables them to pay off creditors over time (typically three to five years).  Often debtors in this situation have substantial equity invested in assets, which they choose to preserve.

Debts not subject to discharge

Bankruptcy does not discharge all types of debts, and filing bankruptcy may not be an appropriate remedy for debtors whose insurmountable debts mainly fall under these types:

  • Child support
  • Spousal support
  • Student loans (except in limited circumstances)
  • Recent income tax debt
  • Debts obtained through fraud or fraudulent misrepresentation
  • Government fines and/or tickets
  • Fraud or defalcation while acting as a fiduciary
  • Personal injury caused by the debtor’s operation of a motor vehicle while under the influence of drugs or alcohol

Anyone considering bankruptcy should discuss income, exempt assets, and debt characterization with an experienced bankruptcy attorney to see what financial remedy offers the most benefit.

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