Choosing the Right Type of Bankruptcy

If your debts are mounting and you are unable to pay, you may want to consider filing for bankruptcy. Individuals can file either Chapter 7 bankruptcy or Chapter 13 bankruptcy. Chapter 7 bankruptcy is a straight liquidation of your assets and Chapter 13 is a repayment plan.

Chapter 7 Bankruptcy

Before you file for Chapter 7 bankruptcy, you must determine if you are eligible. In 2005, Congress amended the Bankruptcy Code, establishing the means test. To determine if you are eligible to file for Chapter 7 bankruptcy, compare your income over the last six months to your state’s median income. If your income is below your state’s median income, you are eligible to file for Chapter 7 bankruptcy. If your income is higher than the state median income, you must satisfy the means test. The means test is a complicated test that determines how much disposable income you have available each month after paying all your necessary bills. If you have a lot of disposable income available, the court will not let you file for Chapter 7 bankruptcy.

In Chapter 7 bankruptcy, your bankruptcy trustee sells your non-exempt assets that then become part of your bankruptcy estate. The proceeds in your bankruptcy estate are distributed to your creditors according to their order of priority. Depending on whether you own your home or the amount remaining on your mortgage, most debtors are able to keep their home. In addition, your car will most likely not be sold. However, any second properties you own, second cars, family heirlooms or anything else of value can be seized and sold by your bankruptcy trustee.  

Chapter 13 Bankruptcy

If you are not eligible for Chapter 7 bankruptcy or if you would like to keep your assets, you may choose to file for Chapter 13 bankruptcy. Chapter 13 is a repayment plan and to be eligible debtors must be able to document regular, reliable income each month. When you file your bankruptcy petition, you also submit a repayment plan that outlines how you will repay your debts in three to five years. You keep all your property, as long as you continue to make your payments each month to your bankruptcy trustee.

Getting Legal Help

If you are considering filing for bankruptcy, speak with an experienced bankruptcy attorney in your state. A bankruptcy attorney can explain the types of bankruptcy and help you decide whether filing for bankruptcy is right for you.