Deciding to file bankruptcy is a huge decision, and once you have taken the plunge you must decide which Chapter you should file. There are certain ways to estimate which type of personal bankruptcy best fits your specific financial situation, here are just a few:
- Income to debt ratio – The first question you must ask yourself is “do I have more debt than income each month?” If the answer is a resounding yes then a Chapter 7 bankruptcy may be best for you. It is typically helpful for individuals with large amounts of unsecured debt and low incomes. The bankruptcy court actually refers to the median income of the state in which you live to determine where your income ranks. To view the current median income information you can go to the US Census Bureau website here. If you see that your household income is above the median for your state then the bankruptcy court may decide that you have enough to pay back a percentage of your total debt and recommend that you file a Chapter 13 bankruptcy.
Prior filings – Determining which chapter of personal bankruptcy to file is also affected by whether or not you have filed either chapter in the past. According to the bankruptcy law an individual can only file for Chapter 7 bankruptcy every eight years. Further, if you previously filed a Chapter 7 bankruptcy and are looking to file a Chapter 13 you must make sure that 4 years have passed. These laws may seem complicated, but they are in place to make sure that individuals do not abuse the system. If you have questions about whether or not you are eligible just make a quick phone call to a local attorney.
- Type of major debt – One of the most important factors in determining which chapter of personal bankruptcy to file is the type of debt you are struggling with. Debt falls into two major categories: secured and unsecured. Secured debts are tied to tangible objects like a mortgage or a car payment. Unsecured debts, on the other hand, are not tied to a specific item. The major types of unsecured debts that Americans struggle with are: credit cards, medical bills, personal loans, and payday loans. If your debt problems are mainly with unsecured debt, then Chapter 7 will most likely be the most helpful to you. However, if your debt is derived from secured debt like your home or vehicle, then filing a Chapter 13 could help.
Differences between Chapter 7 and Chapter 13 Bankruptcy
Chapter 7 Bankruptcy
With Chapter 7 Bankruptcy, you are requesting that the bankruptcy court liquidates your properties to pay off your lenders. There are certain properties and assets that are exempted from this liquidation. The exemptions vary from one state to another. However, if you want a general knowledge about the exemptions, they usually include the following.
You get to keep the cash value of your insurance policies. If your employer provides you with an insurance policy, you will be allowed to keep that one as well.
- Retirement Plans
If you are filing for a chapter 7 bankruptcy, you do not need to worry about losing your retirement plans. They will not be touched if they are going to liquidate your assets.
Your personal property that you use as shelter including mobile homes, or even boats is exempted. There is a limit on the worth of the property but that varies from one state to another. If the worth of the property exceeds the amount, it will not be exempted.
- Personal Property
There are a number of personal properties that are exempted from the Chapter 7 bankruptcy process. Your food, clothing, and electrical appliances in your home will not be touched. Your furnishings will also remain intact. If you have building materials that you intend to use to renovate or repair your home, they will be exempted. However, there is a limit on the worth of the building materials as well. This also varies by state. Your heirlooms and jewelry up to a certain amount are also exempted. Other personal properties that will be exempted include health aids, burial plots, funds held in escrow, and bank deposits.
A percentage of your wages will also be exempted.
- Public Benefits
People who enjoy unemployment benefits will also enjoy some exemptions. They are unemployment benefits and other union benefits. Students financial aids, workers’ compensation, and other public benefits may be exempted. It also depends on the state in which you reside.
- Trade Tools
Tools that you use for your job will also be exempted. If you are a guitarist, your guitar will be exempted. In the same way, if you have a commercial vehicle, it will also be exempted.
- Your professional or business licenses will also be exempted. If you are in a business partnership, the properties involved in the partnership was also exempted. Trust Funds will also be exempted.
Chapter 13 Bankruptcy
With Chapter 13 bankruptcy, you will agree to repay the loan within an extended period. Since you will repay the loan based on an extended payment plan, you will get to keep your properties.
Everyone’s debt situation is different. You may be someone who sees obvious signs about which Chapter would be best for you, or you may be on the fence. If you are concerned about which Chapter to file discuss those concerns with your bankruptcy attorney before any paperwork is signed. Switching chapters once your case has already been filed is doable, but it may cost you more and it will absolutely make the completion of your case take longer.