Chapter 7 or Chapter 13?
If you’ve incurred substantial medical bills—a large and all-too-common contributor to personal bankruptcy filings—or if you’ve gone through a divorce or experienced other personal turmoil, you may be considering filing for bankruptcy protection. You may have options, though, so you want to understand the different form bankruptcy can take and what might be appropriate for you. A bankruptcy attorney can help you decide between Chapter 7 or Chapter 13 bankruptcy filing.
As a consumer (as opposed to a business), the two most common types of bankruptcy filings available are under Chapter 7 and Chapter 13. Chapter 7, also known as liquidation, allows you to permanently discharge certain debts (meaning you’ll never have to pay on them again) but requires that you turn over to a trustee for sale any property or assets with net value in excess of exemptions you are entitled to claim. There are a few things you need to know about a Chapter 7 bankruptcy filing, though:
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- Not everyone can file for protection under Chapter 7 — if your gross income exceeds a certain limit based on the size of your household, you must qualify by taking a “means test,” which is a budget formula used by the IRS in calculating repayment plans for those who have not paid their taxes. Also, if you have enough money left over after paying basic living expenses to make a meaningful payment towards your debts, you may not qualify. In other words, if you have the ability to pay something towards your debts, you may not qualify.
- Certain debts may not be discharged — Child support and alimony can never be discharged and most tax arrearages are also non-dischargeable. You can eliminate student loan payments, but only under extremely limited circumstances.
• You can protect and keep certain types and value of assets — There are property exemptions available under both state and federal law. In New Jersey and Pennsylvania, most everyone uses the federal exemptions. Whatever you can exempt, you get to keep.
• As a general rule, you can’t discharge secured debt and keep the collateral — You can’t discharge a mortgage and keep the house, for instance.
If you have few assets, no job and little prospect for paying your creditors, a Chapter 7 is probably best for you.
A Chapter 13 may be the better choice if you do not qualify for Chapter 7 or want to keep property the trustee would sell. Chapter 13 is basically a personal debt restructuring based on a plan you propose and which the court and the Chapter 13 trustee approve. Plans have to meet certain fairly well established requirements. For those with higher income who are disqualified from Chapter 7 under the Means Test, the plan must pay the minimum monthly payment specified by that formula, for five years. You may still only have to pay only a part of what you owe creditors. If your mortgage, lease payments or car loan are in arrears, you can bring these current under your plan while resuming normal monthly payments. You must pay most tax arrears and alimony and child support arrears in full. Your payments are made for a minimum of three years, but no more than five years.
This is a simplified overview. The rules that apply are somewhat complex so you should consult with an experienced and well-qualified bankruptcy attorney. Before that meeting, you should put together a personal expense budget so the attorney can review it with you. That is something we encourage all our clients to do in preparation for the initial meeting with us, so we can provide meaningful advice. It is time well spent.
Contact Neuner & Ventura, LLP
Our bankruptcy attorneys understand the stress, anxiety and confusion that can be associated with a potential bankruptcy filing. We offer a free initial consultation to every client. For an appointment, call Neuner & Ventura at 856-596-2828 or send us an e-mail. We do, however, reserve the right to charge a fee to review any work done by another bankruptcy lawyer. Evening and weekend appointments are available upon request.
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