Consumer Bankruptcy - Chapters 7&13;
By: Julie Koenig
Debt is intimidating — one unpaid bill can quickly spiral into thousands of dollars in credit card, mortgage and medical debt, leaving you anxious and fearful about how you are going to financially survive. Regardless of whether you fell behind in your payments because of job loss, injury or a death in the family, creditors don't take into account unforeseen life circumstances.
Chapter 7 bankruptcy, also known as liquidation bankruptcy, is one of the most common chapters individuals file. This type of bankruptcy allows individuals to eliminate their dischargeable debts. Often, our clients come to us believing that if they file for Chapter 7, they will lose everything. This is untrue. In a Chapter 7 bankruptcy, most of your property can be claimed as exempt. This means you can keep many of your possessions after the case has finished. We can help you learn about what happens to your property, as well as what type of debt you can discharge.
Chapter 13 bankruptcy is most commonly filed by individuals who are over a certain income level and are not eligible for Chapter 7 bankruptcy. In reorganization bankruptcy, your debt is arranged into a manageable, court-approved payment plan (created by your attorney) that allows you to keep paying on your home, car and other important property. Chapter 13 repayment plans typically last from three to five years, relieving the pressure of immediate debt problems and giving individuals a second chance.
There is no minimum percentage of pay back to general unsecured creditors in a Chapter 13 bankruptcy. The percentage of return to the general unsecured creditors is determined by a formula commonly called means testing. The formula captures all sources of income into the household for the last six months, excluding the month of filing. The debtor's gross wages are entered individually for each pay period. In a Chapter 13, most paycheck deductions are considered in determining the net income for the six month look back period. Once the average net income, per the means test, has been determined, the formula deducts IRS National Standards for all monthly living expenses. The Standards are based on household size and vary by County. Any available monthly disposable income is the required monthly payment towards the general unsecured debt in a Chapter 13.
There are many other factors to consider when completing the means test. Although the formula is meant to be rigid and the IRS National Standards are fixed, there are some deductions unique to each specific debtor that may be deducted as household expenses for means test purposes. A consultation with counsel can help explore those needs specific to your household and that can be accounted for as a means test deduction in some specific circumstances.
One of the most valuable benefits of filing for Chapter 7 or Chapter 13 bankruptcy is the automatic stay that goes into effect, stopping creditors in their tracks. The automatic stay:
- Stops creditor harassment
- Stops foreclosures
- Stops repossessions
- Stops garnishments
- Stops liens
- Stops levies
- Stops all other collection activity