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If you are tired of the constant creditor calls and harassing letters, chances are you have consulted with an attorney about bankruptcy. If you have decided that bankruptcy is the solution for you, the next big decision is what chapter to file. The Bankruptcy Code consists of two primary chapters under which a consumer may petition for bankruptcy: Chapter 7 and Chapter 13. The Chapter 7 Bankruptcy is known as the liquidation bankruptcy. The Chapter 13 is known as the debt reorganization bankruptcy.
In a Chapter 7, all debts are included and discharged in the bankruptcy and the debtor is not required to make payments. A Chapter 7 typically lasts for four months from the date it is filed to the date it is discharged. In a Chapter 13, the debtor is required to make monthly payments to the Chapter 13 Trustee. A Chapter 13 Plan is either three or five years. At first blush, a Chapter 7 Bankruptcy seems to be the most desirable. However, this is not always the case. Both come with their own downsides and benefits and it is important to analyze every aspect of a debtor’s finances before determining which chapter to file under.
One of the first pieces of information that will aid in this decision is how much income the debtor(s) has. If you have been advised to file bankruptcy, it is presumed that you do not have sufficient disposable income to repay your debts in full. However, you may have too much income to qualify for a Chapter 7 Bankruptcy. Bankruptcy courts employ the means test to determine whether an individual qualifies for a Chapter 7. The income limit varies from state to state and is based on US Census data. In Idaho, a family of 4 must make less than $74,149 per year to qualify for a Chapter 7.
Another major factor to consider when deciding which chapter to file under is whether you want to keep your property. If you are current on your secured loans such as home or auto loans, you can keep your property in a Chapter 7. However, one of the most common reasons for filing bankruptcy is to save a home from foreclosure. For these individuals, a Chapter 13 Bankruptcy is the only option outside of a mortgage loan re-modification. In a Chapter 13 Bankruptcy, the past due amount is included in the Chapter 13 Bankruptcy Plan, along with other debts. Your Chapter 13 payment becomes a separate monthly bill, and your most important one at that! You will continue to make your regular mortgage payment directly to the lender as usual.
Another reason a person may want to file a Chapter 13 instead of a Chapter 7 is if they owe a large tax liability that is not dischargeable in bankruptcy but they cannot qualify for an Offer in Compromise. See my post titled “Bankruptcy May Beat an Offer in Compromise” for more information regarding the use of a bankruptcy to settle your taxes. Whether to file a Chapter 7 or Chapter 13 bankruptcy is a big decision that requires expertise and analysis.
Let Martelle & Associates, P.A. help you make the right decision. Click here or call (208) 938-8500 for a no-obligation consultation!