Knowing whether to File Chapter 7 or Chapter 13

In the past, if you got into trouble with debt, it was easy to contact your attorney and file the necessary paperwork, and you were off and running with a clean slate, ready to start over and free from the worry of debt. Well, today it is not so easy. There have been some new laws put into place that make it more difficult to eradicate your debt. Not only is it harder, but now your are required to get credit counseling and some sort of education if you plan on filing that petition in the bankruptcy court. These new activities have also caused the cost of filing to increase, not to mention the cases we are seeing are much more difficult. With the new laws in effect, chapter 7 and chapter 13 bankruptcies are still in season.

With a chapter 7 bankruptcy filing, a debtor is allowed to keep as determined by the court, certain exempt property. Now if there is any other property available it must be sold and then divided among the creditors who have an interest in this case. Now a chapter 13 works a little differently. The court puts together a plan for those that file and have an income to keep non exempt property, a home would fall under this category, and the consumer is able to pay back any debt over a period of 3 to 5 years. Even though these are still intact major changes have taken place designed to keep down abuse of the bankruptcy system and which causes those seeking to file to do as a last resort.

Here is how the new plan unfolds. First of all any debtor looking to file bankruptcy is enticed to file a chapter 13 rather than a chapter 7. If a debtors income is less than the state median then he/she is able to file a petition for chapter 7. However if someone’s income is higher than the state’s median in which they reside, then the debtor may file a chapter 7 but only after a complex system, utilizing statistics, and comparing income to expenses and also taking a look at the amount of unsecured debt an individual has on his personal balance sheet. Unsecured debt is credit card debt or anything that is not backed up or secured with some type of collateral.

If a debtor files a chapter 13 bankruptcy petition, which is commonly referred to as the wage earners plan because a debtor needs some type of income, then the IRS will call upon some stringent guidelines and requirements to determine the amount a debtor can pay back.

As you probably have guessed the fees for filing a chapter 7 have increased because there is more to do to get it done for everyone involved.

After everything is said and done there will be some creditors left out in the cold. In other words they are not slated to receive any type of payment through the plan whether it be chapter 7 or chapter 13. If that is the case the new laws have given creditors the right to contest the bankruptcy ruling. They can now try to have the plan reworked so that they are included in the settlement.

There used to be individuals that would strategically file bankruptcy every seven years which was the allowable time frame to wait between filings. Well now that period has increased to eight years.

A certain amount of equity in your home is protected from bankruptcy based on the homestead exemptions however the amount protected is different for each individual state.

What is you have been saving for retirement and you have a large nest egg saved up? How is that money affected? Well any retirement accounts, such as IRA’s, and your 401K’s cannot be touched by creditors but only up to one million dollars. The new law also allows for some education which will enable the debtor to steer clear of any future problems. Anyone looking to file for bankruptcy must take an approved financial counseling course which provides some other options in lieu of bankruptcy.

Also this course must be taken at least six months prior to filing. Now when everything is said and done and the bankruptcy has run it course and come to an end the individual as outlined by the new law has to take a financial management course which is designed to help them learn the skills of financial management which in essence keeps them from making the mistakes of the past as they pertain to financial matters.

So there are a lot of things to consider if you are thinking about filing bankruptcy.