Qualifying For Bankruptcy: Chapter 7 Vs. Chapter 13 |
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Once you file for bankruptcy, the decisions are not over. You must also decide which type of bankruptcy to file for: Chapter 7 or Chapter 13. Both types of bankruptcy are very different and both have their own pros and cons. Below we will explore what is required of each type and bankruptcy and what the differences between the two are. First, only one of these types of bankruptcy will allow you to have a 'clean slate' immediately, without repaying your debt. This is Chapter 7. Chapter 13 will require that you work out a structured repayment plan with most of your creditors. If you would rather not have the notation of a bankruptcy on you credit report, then you may be better off coming up with a structured payment plan yourself or with the help of a credit counseling agency. However, sometimes having all of your collection and charge-off accounts fall under the veil of bankruptcy on your credit report can help you much more than having these accounts listed as paid collections and charge-offs. Other than the possibility of repaying your debts, the other significant factor between Chapter 7 and Chapter 13 is that, with Chapter 7, you can be forced to have valuable assets liquidated in order to help pay off any debts. Using Chapter 13, this would not be necessary, since you are already entering into a repayment agreement with your creditors. So, if you have a house, car, or other things that you own outright and want to keep, it is best to file Chapter 13 over Chapter 7. There are income requirements you need to meet for Chapter 7 bankruptcy. Basically you must make less than the median income for your state (within the previous 6 months prior to filing) or prove that you do not have the income necessary to pay your current bills plus your outstanding debt -- this is called a means test. For the means test, take your income minus your expenses and plug the total into this equation (replacing the letter "x"): 60x £ 6,000 = Chapter 7 60x ³ 10,000 = Chapter 13 As an example, someone who makes $39,000 a year and has $3,000 a month in expenses would perform the means test like this: $39,000/12 = $3,250 per month $3,250 - $3,000 = $250 per month 60(250) = $15,000 $15,000 ³ $10,000 This person would file Chapter 13. There is a gray area if the number is between $6,000 and $10,000. For these people, they should look at how much unsecured debt they have. If it is over 25%, they will be left with filing Chapter 13 bankruptcy. Overall, the good news is that the annual median income for the US is over $43,500. If you have a family of four or more, that annual US median income is over $65,000; however, it really does depend on where you live. For example, in Connecticut, a family of four will automatically qualify for Chapter 7 bankruptcy with an annual income of $86,000 or less. In West Virginia, a family of four would need to make less than $46,000 a year to automatically qualify. Above all, however, it is important to remember that once you file bankruptcy, you may not be able to do it again for the better part of a decade -- so make your financial decisions wisely. |
