People considering personal bankruptcy are likely in a difficult financial situation. They may have experienced a medical issue that saddled them with massive debts. They may have suddenly lost their job or incurred major expenses due to a divorce.
Many people wait until their situations become very unstable before they start considering bankruptcy. At that point, their mental stress might impact their ability to rationally assess the situation and choose the best possible solution.
One of the first choices the filer has to make when seeking bankruptcy protection involves what chapter or type of bankruptcy to pursue. Most individuals end up opting for either Chapter 13 bankruptcy or a Chapter 7 filing. The best option depends on a variety of different details. Asking the three questions below can help people determine the best form of bankruptcy given their unique circumstances.
Is committing to a repayment plan practical?
A large percentage of people pursuing personal bankruptcy file for Chapter 13 bankruptcy. Chapter 13 bankruptcy involves a multi-year repayment plan. The filer makes structured payments through the courts for between three and five years. In cases where discharging debts rapidly is the priority, Chapter 7 bankruptcy may be the better option. Chapter 13 bankruptcy can be a challenge for those with variable income levels, as they may need to modify the repayment plan if their economic circumstances shift before they make all of the mandatory payments.
Is passing the means test possible?
Chapter 7 bankruptcy is faster because there is no repayment plan required. However, only those with average or lower income typically qualify. Filers have to perform a means test where they adjust their income based on the pay that they have received over the last six months. They compare their adjusted income to the current state median based on their household size. Those with higher income levels may not be able to pass the means test and may therefore not be eligible for Chapter 7 bankruptcy.
Are property exemptions sufficient?
In a Chapter 7 bankruptcy, the trustee overseeing the filing potentially has the authority to demand that the filer liquidate assets to repay creditors before their discharge. Liquidating assets can impact the financial recovery process after bankruptcy. Individuals considering bankruptcy may need to put together an inventory of their personal property to determine if they can protect their assets or if property liquidation might be necessary. In cases where people have more resources that are vulnerable than they do debts that they could discharge, a Chapter 13 bankruptcy might be the better solution.
Reviewing personal circumstances with a skilled legal team can help people choose the right type of bankruptcy. People contemplating a bankruptcy filing may need to discuss their concerns with someone familiar with bankruptcy statutes to clarify their needs, goals, priorities and potential ways forward. That’s both understandable and more than okay.