Chapter 7 or Chapter 13: Bankruptcy Options Explained

Many consumers stressed out by excessive debt obligations during the recession seek protection from creditors under the bankruptcy law. As bankruptcy filing is not an everyday matter, people get confused whether they qualify, and, if they do, what type of bankruptcy to proceed with. There are two major types of bankruptcies: Chapter 7 and Chapter 13.Chapter 7 BankruptcyTo see whether an individual qualifies for a Chapter 7 bankruptcy a means test is conducted that was adopted under recent changes to bankruptcy law. This test is only applicable to individual bankruptcy filings under Chapter 7, i.e. to individuals who intend to discharge primarily consumer debt. The way this test works is that it compares the annual income of an individual to a median income in the state of his or her residency. Individual annual income is calculated by multiplying the average gross monthly income of an individual computed using the data for the six months preceding the filing by 12 months.In case the income of an individual is lower than the median income in his or her state of residency, a debtor may proceed with Chapter 7 filing. If it exceeds the median income, a further assessment of income and expenses is performed in order to establish repayment ability under Chapter 13. Should the amount of disposable income exceed $6,575 over a 5-year period, then a Chapter 7 filing is presumed to be abusive and Chapter 13 filing is recommended. A competent lawyer may easily present the income and expenses in such a way that would satisfy the requirements for Chapter 7 filing. In fact, 85% of individuals do not have to go that far, as their income is lower than the median income in their state of residency.Chapter 13 BankruptcyChapter 13 is suited for individuals who did not pass the means test for Chapter 7. Chapter 13 is commonly an option for individuals with high income, far exceeding the average earnings in the area of their residency. As defined by law, consumers with a regular flow of income, who owe unsecured debts of $360,475 or less and secured debts of $1,081,400 or less, qualify for Chapter 13 bankruptcy. Such individuals should have at least $100 per month in disposable income to make payments under a debt repayment plan. The major issue with Chapter 13 filing is not the question of qualification, but rather the arrangement of a debt repayment plan. In order to lower the required monthly payments, debtors should claim as many allowable living expenses as they can. An experienced law firm may structure your disposable income in such a way that would allow minimal repayments under Chapter 13 that would satisfy the bankruptcy trustees.Bankruptcy is a complicated process that requires profound knowledge of bankruptcy laws and significant experience in the bankruptcy field. Many consumers make a mistake of trying a do-it-yourself approach just to find out that they do not qualify for Chapter 7, facing high debt repayments under Chapter 13 provisions. To avoid common mistakes it is highly advisable to get an experienced bankruptcy attorney on your side. Most bankruptcy lawyers offer free initial consultations and can answer any questions you may have, as well as draw out a cost-effective strategy for your bankruptcy filing.