One of the most common questions asked by people contemplating filing bankruptcy is, “What type of bankruptcy should I file?” It is the most important question in the bankruptcy process as you want to ensure you are filing in the correct chapter.
Individuals can file either of two chapters of bankruptcy: Chapter 7 or Chapter 13. Chapter 7 is a quicker process and results in the discharge of your debts while Chapter 13 is a longer process that reorganizes your debts.
Issues That Help Determine What Chapter Is Best Suited for You:
- Are you in foreclosure?
- Do you owe back taxes?
- Are you behind on your car loan?
One of the biggest factors that help in determining what chapter of bankruptcy is best to file is the debtor’s income situation. Barring certain circumstances, income of the debtor is the most important factor in determining whether that debtor can file a Chapter 7 bankruptcy.
Under the rules in a Chapter 7, a debtor’s average household monthly income for the previous six months must be at or below the median income of a person with the same household size in the state they reside in. For example, a debtor who is married and has two kids must average the total monthly income for the household from the previous six months and compare their number to the state’s median income number for a household of four. If that person is at or below the median income, they qualify for Chapter 7. If they are above it, they may still qualify for a Chapter 7, but they will have to go through what is called The Means Test. The Means Test takes into account different monthly expenses, such as mortgage loans, car payments, taxes, insurance and child care among other expenses. The means test is complicated and experienced bankruptcy counsel will likely be needed to help you complete the test correctly. If you pass the means test, you are eligible to file Chapter 7 and can do so accordingly. If you do not pass the means test, you will have to file Chapter 13 instead of 7.
Some debtors file Chapter 13 even though they may qualify for Chapter 7. There is no income requirement in Chapter 13. However, you want to ensure that you are able to make the monthly payments in a Chapter 13. If you are not, your case will be dismissed and you will be back at square one.
Assets can be the determining factor in which chapter of bankruptcy is better to file. While a debtor may qualify for Chapter 7, they may have assets they cannot fully exempt. Non-exempt assets must either be paid for (whatever value is non-exempt) or surrendered to the court.
Before filing bankruptcy, be sure you understand the value of the property you own. The court requires you list your possessions, which can range from furniture and clothing to your house and car. Everything you list must have a replacement value so the court knows what your items are worth. For example, you would list the value of your vehicle using average trade in value from a car valuation website.
You then need to look at your exemptions and see what you can protect. Every state has an exemption list and depending on your specific circumstances, you will use the exemption list of the state you reside in.
You may find that your property cannot be fully exempted because it has too much value. If that is the case, you will have a decision to make. Most trustees require you to buy back any property that is non-exempt or the property has to be surrendered to the bankruptcy estate. If you are in a Chapter 7, you will have to pay back the non-exempt value relatively quickly (no longer than a year; sometimes 3 months or less). It may be too burdensome for a debtor to have to come up with that money quickly. In those instances, filing a Chapter 13 might be better for the debtor as they would have a much longer amount of time to pay the non-exempt amount back. A chapter 13 can be 3-5 years in length.
Some debtors don’t have any assets or their exemptions are able to protect their property. If that is the case, then Chapter 7 will be their best option.
Are You In Foreclosure?
Another big reason to file a bankruptcy is foreclosure. If the debtor is just looking to surrender the home and make sure they are not responsible for the debt anymore, then Chapter 7 is the best way to go for them. However, many debtors want to keep their home despite being in foreclosure. Chapter 13 is the best way to do that as there are special programs designed for the long length of a Chapter 13 case.
In addition, money owed can be paid back during the duration of the plan. Chapter 13 works better in these situations because the average chapter 13 bankruptcy is 3-5 years in length. Most Chapter 7’s are closed within 3-4 months, so it is harder to work out fair deal there.
Is Your Car In Danger Of Being Repossessed?
If your car is being repossessed, then you might want to file a bankruptcy prior to the car being seized. If so, what chapter you file will depend on certain factors. Can you catch up during the short length of a Chapter 7 bankruptcy? Do you need just a little more time driving your car, or is the car instead a permanent necessity? Are the terms of your car loan fair, or are you instead paying too much for a car worth much less? Answers to these questions can determine what chapter is best for you.
If you owe back taxes, you should consult a bankruptcy attorney prior to filing. Your taxes may be dischargeable in a Chapter 7. However, if they are not dischargeable, you may want to consider filing Chapter 13. Filing a Chapter 13 can toll the interest on your back taxes, resulting in lower payments. In addition, a chapter 13 is a longer process that will allow you time to slowly pay back the tax debt.
Niblock and Associates can assist you in determining which type of Little Rock bankruptcy is the best fit for you.