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Bankruptcy is something that no one wants to have to face, but it can be a great relief for those who need it. Bankruptcy is meant to give you a fresh start if you are over your head in debt. There are several types of bankruptcy, with Chapter 7, chapter 11, and Chapter 13 being the most common. Your goals in filing bankruptcy, as well as your eligibility, will determine which type of bankruptcy is right for you or your business.
Chapter 7
Chapter 7 bankruptcy is also called liquidation. Your non-exempt assets are sold to pay off a portion of your debts. It is the fastest and simplest type of bankruptcy, but it is not for everyone. Eligibility is based on your income or the means test. If your income is no more than the medium income for a household of your size in your state, you can qualify based on your income.
If your income is too high, you may be able to pass the means test. The means test is used to determine if you have enough disposable income to repay some of your debt. If you do not qualify for Chapter 7, you may qualify for Chapter 13.
If you do qualify for Chapter 7, you may not have to sell anything. You only have to sell non-exempt property. One of the benefits of Chapter 7 bankruptcy is that it temporarily, but immediately, stops collection efforts by creditors.
Chapter 13
Chapter 13 may be appropriate if you do not qualify for Chapter 7 bankruptcy, or if you have non-exempt assets which you want to keep. It takes longer than Chapter 7. Chapter 13 bankruptcy is a repayment plan in which you repay a portion of your debts over a period three to five years. You may not have to repay all of your debts.
In order to qualify for Chapter 13, you must have a steady income so that you can make your payments. You unsecured debts must be less than $360,475 and your secured debts must be less than $1,081,400.
Chapter 13 payments are determined by your “disposable income”, not by how much you owe. Your disposable income is calculated by subtracting your allowed expenses from your income. Allowed expenses are determined by the IRS and typically required a reduced standard of living for people who choose Chapter 13 bankruptcy.
