Chapter 7 Bankruptcy or Chapter 13 Bankruptcy?
How Filing for Bankruptcy Can Alleviate Money Problems
May 2, 2009
Although US bankruptcy laws were over-hauled in 2005, those filing for bankruptcy can still overcome serious money problems. Whilst chapter 7 bankruptcy helps consumers to write-off debt in the space of three to six months, chapter 13 bankruptcy helps those with non-exempt assets to restructure debt. The courts now have greater powers in deciding which option is right for a debtor. Both options will affect personal credit scores.
Is Chapter 7 Bankruptcy the Right Option?
Individuals that choose to proceed with chapter 7 bankruptcy will need to provide all non-exempt assets to a trustee. These will be sold and the proceeds distributed to creditors. In practice, most people filing for bankruptcy under chapter 7 have very few assets. This means that an insolvent is able to escape any money problems and become debt-free very quickly.
An Applicant Must Comply with the Chapter 7 Bankruptcy 'Means Test' Rule
In order to proceed with chapter 7 bankruptcy, the applicant will need to pass a means test. Provided that the last six months pay checks are below the median for that state there shouldn't be any problems moving forwards. A legal professional may be able to identify certain expenses that could be used to offset earnings.
Court Power with Respect to Chapter 7 Bankruptcy
Filing for bankruptcy under chapter 7 is unlikely to be approved by a court of law if an applicant has a high disposable income or non-exempt assets that could be distributed to creditors. In practice most people will realise this and apply for chapter 13 bankruptcy or an alternative debt solution, such as debt management, instead.
How Chapter 13 Bankruptcy Helps with Money Problems
Chapter 13 bankruptcy differs to chapter 7 bankruptcy in the sense that it seeks to restructure debts over a period of 3 to 5 years. It provides protection from further creditor action in respect of debt collection or foreclosure and gives someone time to get their life back in order. Filing for bankruptcy under chapter 13 doesn't have quite as grave ramifications for a credit score as repayments are offered to creditors.
When Might Filing for Bankruptcy be the Wrong Choice?
Individuals with debts that consist largely of taxes, alimony, child support, student loans, car loans etc will find that neither chapter 7 or chapter 13 bankruptcy allows them to become debt-free. It can provide protection from creditors for those with serious money problems. The principle beneficiaries are likely to be those struggling with credit card debt. Please note that it is only possible to declare chapter 7 bankruptcy once in any six year period; the rules are different with respect to chapter 13 bankruptcy.
Filing for bankruptcy will help someone with money problems to become debt-free. Debtors on a low income and with very few non-exempt assets are likely to find that chapter 7 bankruptcy is the optimal route. Those who don't comply with the criteria and are able to contribute towards a debt solution may wish to consider chapter 13 bankruptcy.
Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.
Sources
American Bankruptcy Institute
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