The two most popular chapters for filing for bankruptcy in the US are chapters 7 and 13. Of the two, chapter 7 is probably the most popular, as it allows a completely fresh start financially, coming out of the proceedings with no debt, as opposed to chapter 13, which makes an individual repay their debts over time, by means of a repayment schedule, the terms of which can be harsh.
The biggest attraction of chapter 7 bankruptcy is that despite the fact that all ones assets are sold and the proceeds distributed amongst creditors, an individual is then debt free. And therein lies the problem.
Unfortunately for the creditors, a chapter 7 bankruptcy will often leave them financially out of pocket by a large amount.
Now this may be unavoidable, however, it may be that an individual can, in fact, afford to repay their debts if they are rescheduled under a chapter 13 filing, which is essentially a repayment plan over a 3-5 year period.
Therefore, 2005 saw the introduction of a compulsory means test for individuals seeking chapter 7 bankruptcy, failure of which would automatically push them into a chapter 13 filing, which is a 3-5 year repayment plan.
The means test has a number of stages, the first being a calculation of the debtor’s disposable income, based on their earnings over the previous 6 months and deducting various living expenses.
The first stage is to calculate what the applicant’s disposable income has been over the previous 6 months. In other words deducting what the court considers to be reasonable amounts for living expenses for example and seeing what’s left.
The first stage of the test is to see if the applicant’s disposable income for the previous 6 months is less than the median income for a same sized household in the same state. If it is you can go straight into chapter 7. If not, the applicant is to some extent at the mercy of the court, who decide whether the amount of the applicant’s disposable income is sufficient to make some repayment of their unsecured debt. The applicant can often find that the court considers that they can, but in reality it leaves the applicant with very little money to live on, making life tough financially.
This can vary from state to state, as they all have different ideas on what reasonable living expenses are. In other words, you may find that you have very little left to live on, but are forced into a chapter 13 bankruptcy, where debt is repaid over 3-5 years.
The point is that you should really get professional legal advice before filing bankruptcy, so you can be properly prepared.
Bankruptcy is a difficult step, no matter what other people may advise you. It can ruin your financial postion as your credit rating drops. Although chapter 7 is the most popular form of bankruptcy, it may be worth looking at chapter 13 bankruptcy law. If you would like further free information and advice, visit www.chapter13bankruptcylaw.net.
categories: chapter 13 bankruptcy,chapter 7 bankruptcy,Bankruptcy,liquidation,personal finance,wealth management,debt consolidation