Which Bankruptcy Chapter Should I file?
This is one the most frequent questions we get asked. We live in the Google age where online resources are just a few clicks away, but more often than not, most people usually end up with more questions than answers. In truth, if you’re considering bankruptcy you should call us for a free consultation with a skilled bankruptcy attorney and discuss your individual concerns. Consider it an no-pressure informational interview and we can help you with decide whether you need to file a Chapter 7, 13 or don’t need to file at all.
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- Chapter 7 Bankruptcy: An Immediate Discharge of Debt
- Chapter 13 Bankruptcy: A Court Approved Repayment Plan
- Top 7 Reasons to File Chapter 7 (Blog Post)
Chapter 7 Bankruptcy: An Immediate Discharge Of Debt
If you’re like most people, filing a Chapter 7 bankruptcy is your preferred option because you can discharge, i.e. eliminate most, if not all, of your debt within a few months. Immediately upon filing, an automatic stay can stop all creditor collection efforts against you, and upon receiving a discharge order, you will no longer have to repay your discharged debts. It’s the ultimate fresh start however the Bankruptcy laws were changed in 2005 to make qualifying more difficult.
Whether you’re an individual or business, if you qualify to file a chapter 7, you can discharge most, if not all, of your unsecured debt including:
- Credit Cards
- Personal Loans
- Medical Bills
- Business Debts
- Utility bills
- Pay day loans
- Unpaid taxes (min. 3 years old)
- Lawsuits and more
Secured debts such as your home or vehicle loans can also be discharged in a Chapter 7 eliminating the requirement to repay your loans; however, because they are secured you must surrender your asset back to the lender unless you elect one of the following:
- Reaffirm the Asset: if you enter a reaffirmation agreement, you can keep your secured asset, e.g. your vehicle, in exchange for a new debt that survives your bankruptcy. If you fail to pay on your debt post bankruptcy, the lender will repossess your asset, e.g. vehicle, and sue your for any deficiency.
- Ride Through Your Vehicle: You keep your asset and continue to make payments until your loans are paid off, at which time the asset becomes yours free and clear. In theory, this option is no longer available post 2005 however most car manufacturers still accept this option in practice because they would rather you keep the vehicle and they receive payments.
- Stay In Your House and Stay Current on Your Mortgage: It’s possible to discharge your mortgage and still keep possession of the house by staying current on your obligation. Note, the house is still fully secured so if you fail to make a payment the lender can foreclose on the house but there would be no deficiency. This usually occurs when the home is under secured and the lender would rather you stay and pay down your mortgage, even if it has been discharged. It’s complicated but definitely possible if you plan your bankruptcy correctly.
- Redeem the Asset: you can redeem your asset for its current fair market value if it’s value has fallen below your loan amount, i.e. it’s upside down. E.g. you have a vehicle worth 5k, but your loan amount is 10k. You can redeem your car for 5k and thus save yourself 5k. There are third party lenders that can help you facilitate the redemption.
Qualifying for a Chapter 7
Depending on your income, you must now pass a complicated Means Test to determine which Chapter you can file.
- If your income is below the state’s median income level for your family’s size, you qualify automatically to file a Chapter 7 absent some unusual circumstances such as a finding of fraud.
- If your income is greater than the state’s median income level for your family’s size, then you must take the statutory Means Test and demonstrate that your monthly income is not sufficient to pay your current monthly debt. If you pass the Means Test, then you qualify to file a Chapter 7. If not, you must file a Chapter 13 repayment plan. Learn more about the Means Test on our website.
Protecting Your Assets
Knowing what chapter to file is only half the battle. The other half is learning how to protect your assets from liquidation even when you qualify for a Chapter 7. Understandably this is where your attorney can really help you protect your home, cars, jewelry and other personal property. Also, the attorney can help you convert nonexempt assets into exempt assets legally in order to protect even more assets for you. A Chapter 7, with its many benefits also creates many risk for debtors who fail to correctly file their petition and schedules. Remember, if don’t apply apply for the exemptions you risk losing them, and depending on your case it may even get dismissed.
Chapter 13 Bankruptcy: A Court Approved Repayment Plan
If you cannot qualify for a Chapter 7, you still have the option for filing a Chapter 13 bankruptcy repayment plan. A Chapter 13 usually occurs when you either earn too much income, or have too much equity in your non-exempt assets like your home, investment properties and vehicles. A Chapter 13 isn’t for everyone but if you are a regular wage earner and trying to stop a foreclosure, repossession or wage garnishment, this can definitely afford you great protection.
In a Chapter 13 Bankruptcy, you repay the full amount of your secured debt (e.g. home) and priority unsecured debt (e.g. newer taxes) and typically pay only a portion of your non-priority unsecured debts (e.g. credit cards and medical bills). You make monthly payments in amounts determined by your disposable income over a period of 3 to 5 years, and at the end of the program, any remaining unsecured debt is usually discharged and other secured debts can be discharged as well.
The Bankruptcy Lawyers at The Law Offices of Paul Y. Lee can help you today. We represent clients who seek bankruptcy advice and look to discharge debt through Chapter 7 Bankruptcy or Chapter 13 Bankruptcy. Contact Us and an experienced Riverside Bankruptcy Attorney or Orange County Bankruptcy Lawyer will evaluate your case and review your options.
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