Bankruptcy - FAQ's

Frequently Asked Questions

Do I qualify for bankruptcy?


The qualifications for each type of bankruptcy is different. For Chapter 7 bankruptcy, a person’s disposable income must be low enough to pass a specific “means test”. The means test helps you determine if you are eligible for Chapter 7 bankruptcy. This test looks at your income and expenses and kicks you out of Chapter 7 if the numbers don't fit within certain guidelines. The means test also helps determine the length of your payment plan in Chapter 13 bankruptcy. For Chapter 13 there are dollar thresholds for the amount of secured and unsecured debt one may have in order to qualify. The means test is a great determinate on the type of bankruptcy that should be filed.




What is the difference between Chapter 7 and Chapter 13 Bankruptcy?


Chapter 7 is known as a “liquidation” bankruptcy. This type of consumer bankruptcy liquidates most debts, allowing the debtor to make a fresh start. With the Chapter 13 “reorganization” bankruptcy, filers pay creditors through a three- to five-year repayment plan, based upon their current income. In addition, the “eligibility” requirements for each is different. For Chapter 7 one’s disposable income must be low enough to pass the “means test”, while with Chapter 13 there are dollar thresholds for the amount of secured and unsecured debt.




Which one is right for you?


The type of bankruptcy that you can be filed will depend upon your personal situation. For many debtors, Chapter 7 bankruptcy is a better option than Chapter 13 bankruptcy. For instance, Chapter 7 is quicker, many filers can keep all or most of their property, and the debt is wiped out, thus allowing the debtor to make a fresh start. With Chapter 13, filers pay creditors through a three- to five-year repayment plan, based upon their current income. But with the Chapter 13 “payment plan” bankruptcy, the debt is not “discharged” until after the payment plan is completed.




Is declaring bankruptcy worth it?


Most people consider bankruptcy when their debts become insurmountable, they are receiving calls from collection agencies, and they are facing foreclosure on their property. Given these circumstances, a lot of people consider filing bankruptcy under Chapter 7. The basic idea in a Chapter 7 bankruptcy is to wipe out (discharge) your debts in exchange for your giving up property (except for “exempt” property which the law allows you to keep). In most cases, a lot of your property will be exempt. But property which is not exempt is sold, with the money distributed to creditors. If you want to keep property like a home or a car and are behind on the payments on a mortgage or car loan, a “debit renegotiation'' would be part of this process. That is because Chapter 7 bankruptcy does not eliminate the right of mortgage holders or car loan creditors to take your property to cover your debt.




What happens if I declare bankruptcy?


The first thing filing bankruptcy does is that it immediately stops all of your creditors from seeking to collect debts from you (at least until your debts are sorted out according to the law). The bankruptcy filing will also stop foreclosure on your home, prevent repossession of a car or other property, restore utility service, and allow you to challenge the claims of a creditor. Bankruptcy may make it possible for you to eliminate the legal obligation to pay most or all of your debts. This is dependent upon your financial situation, your income, amount of debt, and the type of bankruptcy you file.