Thursday, August 21, 2008

Which Bankruptcy Works For Me?

For most Americans, there are two applicable chapters in bankruptcy, chapter 7 and chapter 13. The determination of filing either a chapter 7 or chapter 13 is made first, by the consumer's needs and second, by the amount of assets or amount of income. As part of the changes made to the bankruptcy laws in 2005, Congress implemented a "means test". This "test" starts with a six month average income and deducts expenses. The result of the average income less expenses is usually determinative of the chapter one files.

Reasons for Filing Chapter 13

Aside from the means test calculation, taxes, saving one's home, and keeping assets are the most common reasons to file chapter 13. Chapter 13 allows a consumer to pay tax liabilities over time without penalties and interest. One can also catch up on mortgage payments in a chapter 13. If a consumer has assets he or she wants to keep, but can't afford to payoff all the debt, payments can be made to the extent of the value of the assets.

Chapter 13 can be complicated. An attorney should be used to navigate through this bankruptcy.

Chapter 7

Chapter 7 is effectively a liquidation. Someone filing under this chapter figuratively comes to the court and says, "here's all my stuff, here are my debts, and here's my income. I don't have any assets to pay my debts and I don't have enough income to pay off what I owe."

In both chapter 13 and chapter 7, a trustee is appointed. The chapter 7 trustee is charged with the responsibility of collecting assets, investigating transfers, if any, and scrutinizing financial records to determine the truthfulness of the bankruptcy papers.

Although it is preferable to proceed under chapter 7 because of the quickness of completing the case, it can also be more stressful for the consumer if any potential issues exist.

Which One is Best For You?

You will have to seek an attorney to thoroughly answer your question. But, you first need to determine if you have any assets above your allowed exemptions. When you file bankruptcy, all of your property becomes "property of the bankruptcy estate". Congress allows certain exemptions, that is property that will be excluded from the bankruptcy estate. In Florida, these items include your home (with some exceptions), $1,000 per person personal property (at garage sale value), $1,000 per person in a vehicle (Yes, Florida legislators believe you only need a car worth $1,000), retirement plans (including IRAs, pensions, etc) and a few more items.

After looking at your assets, you next need to consider your income to determine if it exceeds the median income for someone in your area. The median income for a family of 4 in Florida is $66,876. If your income exceeds this amount, you will need to look at the "means test" to determine whether you can filed Chapter 7.

If you do not have any assets above your exemptions; you are current with your mortgage, or you are not current and want to give up your home; you do not owe the IRS a more than a couple thousand dollars; and your income is below the median income, you should be able to file a chapter 7 bankruptcy. There may be other issues, so you should not consider this statement a final determination of your situation.

The following circumstances are some reasons you should consider Chapter13:

If circumstances caused you to get behind on the mortgage, but you can now afford the mortgage payment if you did not have to pay your credit card bills.

If you have assets above your exemptions that you would like to keep.

If you have recent IRS obligations that you could afford to pay over time.

Income level is above the median income and you have a positive number after "means test" is performed.

There are other reasons to file a chapter 13 bankruptcy that may benefit you. But, it depends on your specific circumstances.

1 comment:

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