Once you’re certain about filing bankruptcy, you must determine the bankruptcy that suits your situation – Chapter 7 or Chapter 13. Given below is an overview of the two types of bankruptcy (Chapters 7 & 13), to help you make the right decision.
Chapter 7 Bankruptcy
It involves liquidation of the debtor’s secured assets (a house or a car) and discharge of unsecured debts (unpaid medical bills, credit card bills, etc.). Its paperwork contains a list of all the properties of the debtor and the possible state or federal ‘exemptions’ for each of them. ‘Exemptions’ work as following:
- An item, not covered by an exemption, can be sold by the trustee to repay your unsecured debts.
- You can keep the items covered by the exemption.
- If the exemption is less than the item’s worth, you’ll get the difference.
- You might be allowed to keep non-covered exemption properties by purchasing them, provided you don’t use the salary, earned post-filing bankruptcy, or a loan from friends and family.
Federal exemptions include real estate, personal property, motor vehicle, jewelry, household items such as appliances, clothes and furnishings, tools, machinery, computer equipment, life insurance policy, retirement accounts and wildcard exemption. You can discuss them in detail with the best bankruptcy lawyers of Los Angeles & Dalla, TX, by visiting www.recoverylawgroup.com or calling 888-297-6203.
If you think you would take 5 or more years to repay your debts, have limited assets or your debts’ amount is more than 40% of your annual income, then it might be appropriate for you to file Chapter 7 bankruptcy.
It is for those who can’t repay the debts due to insufficient disposable income and thus, need their debts to be pardoned. A higher disposable income will lessen the possibility to file this bankruptcy. The candidature is decided based on results of the statements of the debtor’s monthly income (it should be below the median of the debtor’s state) and the means test calculation.
Steps to File Chapter 7 Bankruptcy
- Complete the necessary credit counseling, 180 days prior to filing (agencies given on the United States Courts website).
- Finish the paperwork to prove you’ve passed the means test.
- Lodge a petition at your local bankruptcy court and confirm the necessary paperwork to be brought. An automatic stay will start that’ll stop the creditors from enforcing the collection of debts from you.
- Meet the trustee and the creditors and answer their questions about your finances.
- The trustee will determine your eligibility. In case the trustee declares you ineligible for Chapter 7, you can apply for Chapter 13.
- Discuss the handling of your non-exempt property and secured debts with the trustee.
- Under your trustee’s guidance, find an approved agency on the United States Courts website, complete the financial management course and submit your certificate of completion.
- Get your discharge.
Chapter 13 Bankruptcy
It involves creating a repayment plan for a set period of time (usually 3-5 years) that allows the debtor to repay a decided amount as monthly installments, without liquidation. It has both ‘exempt’ (home, cars, personal or household items) and ‘non-exempt’ (luxuries like a boat, extravagant collection, etc.) properties. Every state has its own rules of ‘exemption’. However, ‘non-exempt’ assets can either be paid for or can be sold.
Your disposable income (calculated by a means test) determines the amount of debt you owe to credit card companies (unsecured debt). Your secured debts (your home, car, etc.) will be put up as collateral which the creditor could take back in case you fail to stick to the repayment plan. Once the agreed-upon amount of debt is paid, your unsecured debts might get discharged.
If you don’t wish to lose any of your assets (including non-exempt items) and think that you’ll be able to repay your debts on time over a period of 3-5 years, then in Chapter 13 might be the right choice for you.
You must provide evidence of your regular income. You should have less than $1,257,850 in secured debt and less than $419,275 in unsecured debt (These amounts are as of April 2019 and are adjusted after every 3 years for inflation).
Steps to File Chapter 13 Bankruptcy
- Complete the necessary credit counseling, 180 days prior to filing.
- Complete all the paperwork including tax return, income verification, the amount owed to creditors, your monthly living expenses and list of all your property, accounts and leases.
- Lodge a petition which will, in turn, start an automatic stay.
- Create and submit a repayment plan within 14 days of lodging petition.
- Even if your papers not yet approved, start following the plan within the first 30 days of filing.
- Meet the trustee and the creditors and answer their questions about your finances and the proposed plan.
- The judge will declare the approval of the plan in a court hearing. If not approved, you might be asked to make changes in the plan.
- Follow the plan diligently for the next 3-5 years.
- Find an approved agency and complete the financial management course.
- Get your discharge.
In case your creditors are harassing you even after the onset of the automatic stay, you can inform the bankruptcy court which will decide the next action.
Things to Do After Filing Bankruptcy
- In addition to following the approved plans and court orders, work on rebuilding your credit scores.
- Make sure none of your accounts is shown as ‘outstanding’ or ‘delinquent’ and are shown as ‘discharged’ or ‘included in bankruptcy’ on your credit report.
- Apply for a low limit credit card.
- Reinforce responsible and smart habits of paying your bills on time and budgeting.