Which Type Of Bankruptcy Should I File?
You have several options when choosing which type of bankruptcy to file. For most consumers and even small business owners, those choices come down to a Chapter 7 or a Chapter 13 bankruptcy. While a free phone consultation with our firm can most easily help you determine which type of bankruptcy you should file, this short article will help you begin to understand the difference between Chapter 7 and Chapter 13.
Understanding The Types Of Bankruptcy
A basic understanding of a bankruptcy filing is helpful in determining your options. For starters, the primary difference between a Chapter 7 and a Chapter 13 is that in a Chapter 7 your debts are discharged over a very short period of time. In a Chapter 13, you agree to a Chapter 13 Plan which consists of monthly payments you will make over a course of three to five years.
When I discuss Chapter 7 with potential clients, I make sure they know that because Chapter 7 is a complete discharge of debt, you must qualify for Chapter 7. We analyze your income and assets to determine if you qualify for Chapter 7. If your income is too high or if you have too many assets—or equity in those assets—then you may not qualify for Chapter 7. Or, you may qualify for Chapter 7 but in such a way that you should be prepared to either turn over an asset or pay the unexempt equity to the Trustee. You will be well aware of any potential for this scenario before you file the bankruptcy.
Good News Regarding Choosing A Type Of Bankruptcy
The good news is that if you do not qualify for Chapter 7, you can almost always qualify for Chapter 13. In my view, Chapter 13 was created as a compromise for debtors. It’s simply not fair that if you don’t qualify for Chapter 7, you should not be entitled to any debt relief. As a result, Chapter 13 offers a different option. The compromise is that in Chapter 13 you commit to paying your creditors something—but not everything—over a three to five year period.
The Chapter 13 payment is often expressed as a percentage of your debt. In other words, in Chapter 13 you may be said to have a “10 Percent Plan”. This means you will pay approximately 10 percent of your unsecured debt over the five year Plan period. Upon the final payment, the remaining 90 percent of your debt will be discharged. While the Plan is expressed as a percentage, it is actually a function of your monthly budget. Our firm submits a budget to the court showing your monthly income, subtracting your monthly expenses, and any amount of money left over each month becomes the basis for your monthly payment in Chapter 13. That monthly amount, when calculated over the five year re-payment period, can then be expressed as a percentage. For instance, if you have $60,000 in unsecured debt, and you will pay $100 per month, you will pay $6,000 over a five year period. That is roughly a 10 percent Plan.
Common Triggers For Which Type Of Bankruptcy To File
There are some indicators which will push you in one direction or the other, when considering which type of bankruptcy to file. For instance:
- Mortgage Arrears / Foreclosure – If you’re facing a foreclosure, or if you’re behind on your mortgage, Chapter 7 will not help you to manage that debt. If you wish to keep the house in bankruptcy, you will need to file a Chapter 13. The reason is that Chapter 13 is designed to FORCE YOUR CREDITORS to allow you to catch up on a mortgage over the five year re-payment period.
- Vehicle Arrears – The same is true for a situation where you’re behind on a car payment. You can use a Chapter 13 to not only pay off the vehicle over the next five years, but also to slowly catch upon on the missed payments.
- Excess Equity In An Asset – While bankruptcy allows you “Exemptions” to protect some or all of your property, there are times when you have too much equity in one or more assets. This may make a Chapter 7 an impossibility. Chapter 13, alternatively, allows you to file for bankruptcy. The compromise is that over the five year re-payment period, you must pay your unsecured creditors an amount equal to or exceeding the unexempt equity in your combined assets. An example would be a vehicle which has $10,000 in equity. You can exempt $3,500 of the equity with your vehicle exemption. That leaves $6,500 of “unexempt” equity. So long as your Chapter 13 plan pays your unsecured creditors at least $6,500 TOTAL over the five year re-payment period, you can file Chapter 13.
- Priority Debt – Some debts take priority in bankruptcy. An example would be IRS debt which is less than four years old, or missed child support or spousal support payments. You can file a Chapter 7 with this type of debt, however, the debt will survive the bankruptcy. If instead you choose to file Chapter 13, the Chapter 13 Plan payments will be structured in such a way that when you finish Chapter 13 you are current on all priority debt. In the meantime, very little or NO INTEREST accumulates on those debts while you slowly repay. This can result in a savings of thousands of dollars for clients while giving them the breathing room of a five year period to re-pay.
Don’t Let Confusion Keep You From Moving Forward
If you’re asking “What type of bankruptcy should I file?!” don’t worry, we’re here to help. Often a quick phone call with our office can provide peace of mind that there are numerous options. And we can explain how each of those options work.
You can call us at 704.749.7747 or click to request a FREE CONSULTATION and you will speak with an attorney today. We know you have options. Recovery may be only a phone call away. We hope you choose to recover with The Layton Law Firm.