In the minds of some people, bankruptcy has become a dirty word, a get-out-of-debt-free card that doesn’t sufficiently punish people who were financially irresponsible. While that may be true in some instances, we view the proper handling of a bankruptcy filing as providing our clients with the opportunity to wipe the slate clean, or to create a fair repayment plan to creditors.
One of the most important questions our clients ask us if which type of bankruptcy they should file. In some cases, it is fairly easy to make a recommendation, and in other cases, the decision is more complicated. The two most common types of bankruptcy for individual filers is Chapter 7 or Chapter 13. Let’s focus on Chapter 7 bankruptcy, and explain how it works and why it may be the best choice for some of our clients.
What Is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is sometimes known as ‘liquidation bankruptcy,’ because some or all of your property can be sold (or liquidated) to settle your debts. When you file Chapter 7, you can protect $5,000 of equity in your vehicles, or $10,000 if you are disabled or elderly. You can also protect $3,000 in household goods if you are single, and $6,000 if you are filing jointly with a spouse. Filing Chapter 7 also allows you to protect $60,000 worth of equity in a primary residence, or $90,000 if you are disabled or elderly.
The main advantage of filing Chapter 7 is that it typically wipes away all unsecured debt, which refers to debt that doesn’t have any collateral. Unsecured debt can include:
- Medical Bills
- Credit Card Debt
- Bank Loans
- Deficiency Judgments
- Phone Bills
However, filing Chapter 7 will not eliminate a client’s responsibility to pay for child support, spousal maintenance, student loans, court fines, criminal restitution, or unpaid taxes, although under certain circumstance some tax debt is eligible to be wiped out.
Who Is Eligible To File Chapter & Bankruptcy?
In most instances, you will need to take a ‘means test’ that determines whether your income is at the level necessary to file Chapter 7 bankruptcy. The means test is a formula that ensures that people who exceed a certain income threshold do not try to use Chapter 7 to get rid of their debts, when Chapter 13 would be more suitable.
The biggest factor in the means test is determining the amount of disposable income an applicant has available to pay debts. In general, the more disposable income that a person has, the less likely it is that he or she will qualify for Chapter 7. The reason is that Chapter 7 is reserved for people who don’t have the reasonable ability to pay their creditors as opposed to establishing a repayment plan.
If you qualify under the means test, the court will then review your income and your expenses before making a final decision.
Why You Need a Bankruptcy Attorney
As your bankruptcy attorney, our job is to provide you with the information you need so that you can make an informed decision about the type of bankruptcy that best matches your needs.
After that decision is made, we can complete the forms necessary to submit your application, and review them to ensure that everything is in order. Most importantly, we will protect your rights when you attend the mandatory hearing where you meet all your creditors.
For those who qualify, Chapter 7 can be the quickest and easiest form of bankruptcy, but it doesn’t make sense for every client, which is why it’s so vital that you consult with the experienced bankruptcy attorneys at Kinnaird & Kinnaird, P.C. to learn how we can help you.