Choosing the Best Bankruptcy to File

In many cases, Chapter 7 bankruptcy is a better fit than Chapter 13 bankruptcy. For instance, Chapter 7 is quicker, many filers can keep all or most of their property, and filers don’t pay creditors through a three to five year Chapter 13 repayment plan. But not everyone qualifies to file for Chapter 7 bankruptcy and in some cases; Chapter 7 doesn’t provide the help the filer needs.

Advantages of Chapter 7 Bankruptcy

Chapter 7 bankruptcy is an efficient way to get out of debt quickly, and most people would prefer to file this chapter, if possible. Here’s how it works:
• It’s relatively quick: A typical Chapter 7 bankruptcy case takes three to six months to complete.
• No payment plan: Unlike Chapter 13 bankruptcy, a filer doesn’t pay into a three- to five-year repayment plan.
• Many, but not all debts get wiped out. The person filing emerges debt-free except for particular types of debts, such as student loans, recent taxes, and unpaid child support. (For more on these “non-dischargeable” debts, see
• You can protect property. Although you can lose property in Chapter 7 bankruptcy, many filers can keep everything that they own. Bankruptcy lets you keep most necessities, and, if you don’t have much in the way of luxury goods, the chances are that you’ll be able to exempt (protect) all or most of your property.
• You can keep a house or car in some situations. You can also keep your house or car as long as you’re current on the payments, can continue making payments after the bankruptcy case, and can exempt the amount of equity you have in the property.
Who Should File for Chapter 7 Bankruptcy?
Chapter 7 works very well for many people, especially those who:
• own little property
• have credit card balances, medical bills, and personal loans (these debts get wiped out in bankruptcy), and
• whose family income doesn’t exceed the state median for the same family size.
You’ll take the means test to see if your income qualifies for this chapter. If your income is below the average income for a family of the same size in your state, you’ll automatically qualify. If your income is higher than the median, you’ll have another opportunity to pass. However, if after subtracting allowed expenses, including payments for child support, tax debts, secured debts (such as a mortgage or car loan), you have income left over to make a significant payment to your creditors (called disposable income more below), you won’t qualify to file for Chapter 7 bankruptcy. Chapter 7 bankruptcy isn’t the best choice for everyone. Chapter 7 won’t help people whose debts won’t get wiped out (discharged), like certain income tax debt, student loans, and domestic support obligations. High-income filers find it hard to qualify. It’s also not a good fit for people who would lose substantial equity in a home or other property if they filed for Chapter 7 bankruptcy, or those facing foreclosure or repossession. For those individuals, Chapter 13 bankruptcy would likely be a better choice. Most people prefer Chapter 7 bankruptcy because, unlike Chapter 13 bankruptcy, it doesn’t require you to repay a portion of your debt to creditors. In Chapter 13 bankruptcy, you must pay all of your disposable income the amount remaining after allowed monthly expenses to your creditors for three to five years.

What Is Your Disposable Income?

Disposable income is the amount that remains after subtracting allowed bankruptcy expenses from your monthly gross income. Your disposable income will determine whether you qualify to discharge (wipe out) debt in Chapter 7 or Chapter 13 bankruptcy. When you claim your deductions, you’ll be able to use the actual cost of some expenses. For others, such as the allowance for food, clothing, and housing, you’ll use the national and local standards.
Here’s a list of some of the deductions you’ll be allowed to take:
• food and clothing
• housing and utilities
• transportation costs
• taxes
• involuntary payroll deductions
• life insurance
• court-ordered payments, such as family support
• certain education costs
• childcare expenses, and
• health care costs.
In a Chapter 7 case, you’ll complete the Chapter 7 Means Test Calculation form. You’ll deduct allowed expenses to find your disposable monthly income. Next, you’ll multiply that amount by 60 months. If the figure exceeds the maximum amount currently allowed (which will be listed on the form), you won’t qualify for a discharge. Additionally, you might not qualify if your disposable income is sufficient to pay 25% or more of your unsecured, nonpriority debt (such as credit card balances, medical bills, and personal loans). In a Chapter 13 matter, you’ll fill out the Chapter 13 Calculation of Your Disposable Income form. The amount that remains after deducting expenses is your monthly disposable income. You’ll pay that number to your unsecured, nonpriority creditors each month over the course of your three- to five-year repayment plan. Because each case is different, determining whether you qualify for bankruptcy can be challenging. When in doubt, contact a knowledgeable bankruptcy attorney.
Here are a few other things filers find challenging about Chapter 13 bankruptcy:

• You must complete the entire three- to five-year repayment plan before any qualifying debt balances get wiped out (unless the court lets you off the hook early for hardship reasons).
• If you owe non-dischargeable past due taxes, or support arrearages, you’ll have to pay off the entire balance in your plan (many people don’t have sufficient income to do so).
• To keep a house or car, you’ll need to repay the arrearages over the course of your plan (while continuing to pay your regular monthly payment).
• Many people who file for Chapter 13 bankruptcy don’t complete their plans, so filers run a very real risk that their debts won’t be discharged.
Here are common mistakes you should avoid before filing for bankruptcy.
Lying about Your Assets
Chapter 7 bankruptcy includes a “means test,’’ a requirement that you disclose all of your assets and income, which determines your capacity to pay off creditors. If you purposely leave out assets or income, trying to help your qualification, your case could be dismissed. You could also be banned from filing on those debts ever again. Eventually, a bankruptcy trustee will have access to your financial records, so it’s unlikely your deception will go unnoticed. You shouldn’t try to hide any creditors, either, because credit-card companies have centralized and computerized information. They will all know you have filed for bankruptcy protection. Bottom line: Tell the truth.
Not Consulting an Attorney
Bankruptcy law is too complicated for the average consumer to understand. Bankruptcy attorneys know all the subtleties, which might escape uninformed people. Example: If you have a child with a part-time job while still living with you and being claimed as a dependent their earnings must be counted toward household income. Attorneys should know legal ways to protect assets that could be at risk. It might be tempting to save money in this do-it-yourself era, but it’s probably not worth the trouble or risk.
Giving Assets (Or Payments) To Family Members
This is a major red flag. You can’t give away your good stuff cash, property, cars, jewelry, electronics to friends or relatives with the understanding they will give it back later. It’s dishonest. Giving your car to a family member just before you file for bankruptcy is a clear-cut way to lose the car. If you own the car, it must be listed as an asset or if you still owe money, it must be listed as a liability.
Running Up Credit Card Debt
This won’t work, either. The mentality of using your available credit before filing for bankruptcy will catch up to you. After receiving the bankruptcy notification, if the creditor believes you ran up your credit-card balance before filing, it can challenge the request to eliminate some or all of what you owe him. You could end up owing money on your credit cards, even after the bankruptcy is over. Usually, any credit purchases you make within 90 days of filing for bankruptcy are not included in the bankruptcy debts. You might have to pay your credit-card debt in full and creditors could accuse you of fraudulent borrowing. To be safe, once you choose to file bankruptcy, you should stop using the credit card.
Taking on New Debt
Even more than credit-card use, it’s especially irresponsible to take on new debt, especially if you tap into a home equity line. Again, the prudent course is to suspend all debt once you know bankruptcy is the step you’re going to take.
Raiding the 401(k)
If you think it’s good business to raid your 401(k) or IRA retirement accounts to stash away some money or pay off some creditors shortly before filing for bankruptcy, think again. First, paying off some creditors (but not others) is not allowed under the bankruptcy code because you are favoring one creditor over another. More importantly, though, your retirement accounts are exempt when filing bankruptcy so it makes no sense. IRAs, Roth IRS, SEP and Simple IRAs, Keogh plans, 401(k) accounts and pension plans are exempt, so they can’t be seized by creditors or a bankruptcy trustee.

Transferring Property to Family or Friends

This is illegal and a certain way to derail your bankruptcy efforts. You are not allowed to transfer any assets for the purpose of protecting them.
Not Doing Your Research
Not all debt is covered by bankruptcy. Student loans, tax debt, child support and alimony payments are not dischargeable. Do your research and lean on the information offered by trained professionals.
Reasons to Consider Filing for Bankruptcy
Surveys agree that job loss and medical debt are the two biggest reasons for considering bankruptcy. Many times, the two team up and light a torch to a family’s financial plans. Health problems can make it difficult or even impossible to do your job. The result is you either quit or are let go by the company. That is a toxic combination because you lose your source of income at precisely the same time expenses go up. There are some other, less imposing situations that could cause you to consider bankruptcy. You might be headed down that road if:
• You are getting a divorce
• Creditors are suing you for payment of debts
• The home you own is under water and in danger of foreclosure
• The only way you can pay for things is using a credit card
• You use one credit card to pay off another
• You are considering withdrawing money from a 401(k) account to pay bills
Impact of Bankruptcy
• Private life: Filing for bankruptcy means your name goes public. It’s not going to appear on a billboard downtown, but it could appear in the legal notices of your local newspaper or read over local radio or TV stations that broadcast legal notices. It also is available to anyone with a PACER (Public Access to Court Electronic Records) account. The mandatory meeting with creditors occurs in a public forum and it appears on your credit report, for whoever has access to that.
• Credit score: Most likely, your credit score already has taken a beating because of nonpayment, but filing for bankruptcy will hurt your credit score further. It’s impossible to forecast exactly how far it will drop because too many factors are involved, but experts agree: the higher your score, the more you will fall. If you had a credit score over 700, it could drop 100-200 points. If you’re under 700, the drop could be more like 75-150 points. What is for sure is that a Chapter 7 bankruptcy will remain on your credit report for 10 years and Chapter 13 will be there for seven years.
• Co-signers: These are people who sign their name to a loan, saying they will pay if the person receiving the loan does not. In Chapter 7 bankruptcy, the co-signer is on the hook. Creditors can go after him/her for payments, even if your bankruptcy case is discharged (successful). Chapter 13 is a different story. The protective “stay” that prevents creditors from pursing payments once you file for Chapter 13, extends to the co-signers. That stays remains in effect as long as you make regular payments on your Chapter 13 agreement.