Is Filing for Bankruptcy the Right Choice?

Wondering if filing for bankruptcy is the right choice for you? Or are you trying to find out how much you need to owe to qualify for filing for bankruptcy? 

Both are fair questions, but not the right one. 

The real question is about your ability to pay your debts. If you are unemployed, even a minimal payment can lead to ruin. Sometimes, even if you can make the minimum credit card payment, you might be better off filing for bankruptcy.

For example, consider a client that has an average, middle management job with a house, a wife, and an eight-year-old son. Within the space of a little more than a year, the client lost his job and his wife divorced him. He then found a new job that paid about $31,000 per year, but he was forced to rent an apartment and was unable to pay anything except about $300 in minimum payments to the $9,000 he owed in credit cards. 

The client decided to file for a Chapter 7 bankruptcy, because $300 per month was the difference between renting a tiny studio apartment and simply staring at a television with his son and renting a one-bedroom apartment and being able to occasionally take his son out to a Marlins game or to Zoo Miami.

Bankruptcy, while certainly not an easy process, is often the best option for individuals and families who face illness, job loss, divorce, or other significant game-changing circumstances. It provides relief from creditors and can help get your family back on its feet a lot faster than other options. 

How does Chapter 7 bankruptcy work?

The court puts an automatic temporary stay on your current debts when you file for Chapter 7 personal bankruptcy. This automatic temporary stay keeps creditors from garnishing your wages, collecting payments, repossessing property, foreclosing on your home, turning off your utilities or evicting you. The court will then legally possess your property and select a bankruptcy trustee to oversee your bankruptcy case.

The role of the trustee is to review your assets and finances and oversee your Chapter 7 bankruptcy case. The trustee will sell specific property that the bankruptcy won’t let you keep, known as nonexempt property, and use the proceeds of the sale to pay back your creditors. They will also arrange and run a meeting between you and your creditors, known as a creditor meeting. During this meeting you go to the courthouse and answer questions about your bankruptcy filing.

The list of exempt property that you don’t need to sell or turn over to creditors, as well as the total money value that you can exempt from your bankruptcy case, can vary depending on the state. Some states allow you to choose between the federal exemptions and their exemption list. However, most Chapter 7 bankruptcy cases are “no asset” cases, which means all of your property is exempt or there is a valid lien against your property.

At the end of the Chapter 7 bankruptcy process, about four to six months after your initial filing, the bankruptcy court will discharge your remaining debts, which means that you no longer need to pay them back. That being said, there are some debts that are not dischargeable through bankruptcy, including alimony, court fees, child support, most student loans, and some tax debts.

The difference between a Chapter 13 and Chapter 7 bankruptcy

Chapter 7 and Chapter 13 bankruptcy are the two most common kinds of bankruptcy that impact customers. Either of these types of bankruptcy can help when you are unable to pay your bills, but there are several huge differences between Chapter 7 and Chapter 13 bankruptcy.

A Chapter 7 bankruptcy can wipe out specific debts within a matter of months, but a trustee appointed by the court can sell your nonexempt property to pay back your creditors. You also need to have a low income in order to qualify for a Chapter 7 bankruptcy.

A Chapter 13 bankruptcy enables you to keep all of your stuff and get on an affordable repayment plan to pay back your creditors. You need to have enough money in order to afford the creditors’ payments, and you also need to stay below the maximum total debt limits, which are currently about $400,000 for unsecured debts and over $1 million for secured debts.

A court will approve the Chapter 13 repayment plan, which typically lasts about three to five years. Your trustee will collect all of your payments and send them to your creditors. After you finish the repayment plan, the rest of the unsecured debts are discharged.

Who qualifies for Chapter 7 bankruptcy?

You have to meet several requirements to qualify for a Chapter 7 bankruptcy, including:

• You typically need to finish a group or individual credit counseling class from an approved credit counseling agency within six months before filing for bankruptcy.
• Your average monthly income over the past six months should be less than the median income of the same-sized household in your state or you need to pass a means test, which figures out if your disposable income is high enough to make partial payments to unsecured creditors. You might still be allowed to file a Chapter 13 bankruptcy if you don’t pass the means test.
• You are not eligible if you have filed a Chapter 7 bankruptcy over the past eight years or a Chapter 13 bankruptcy over the past six years.
• You need to wait at least 181 days before trying again if you attempted to file a Chapter 7 bankruptcy or a Chapter 13 bankruptcy and your case was dismissed.
• A court can dismiss your bankruptcy case if it figures out that you are attempting to defraud your creditors. If you use credit cards or take out a loan with the intent of declaring bankruptcy to avoid repaying your debt, then the court can dismiss the case.

If you still have questions regarding bankruptcy or anything related to credit card debt, then it’s time to reach out to a bankruptcy and debt relief attorney. The team at the Van Horn Law Group has the experience you need and a passion for helping clients understand and navigate their financial situations.