When financial catastrophe strikes, many people are confused about whether they are eligible for bankruptcy and if so, which chapter they might need to file. Often, these unfounded concerns keep people from seeking help that will provide them significant financial relief.
Almost everyone considering bankruptcy is eligible for relief. The court will analyze how much you have made in the 6 months prior to filing to determine whether you are eligible for Chapter 7 or will be forced to repay some debts in a Chapter 13 plan.
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The only real issue with eligibility for someone considering bankruptcy for the first time is if they make too much money while at the same time, owe too much. The overwhelming vast majority of people in financial trouble are not going to have this problem.
As to which chapter you should file, Chapter 7 should hold a heavy presumption that it is the best option unless special circumstances exist that make Chapter 13 either required or more desirable.
First, as stated above, some people make too much money and so you are ineligible for Chapter 7. Over the 6 months prior to filing, if you have made more than the median income for your household size, you must take the means test.
If you fail the means test, then the law will force you into Chapter 13. The means test will give a monthly amount you are required to pay for 5 years to get a Chapter 13 discharge.
This will often be a very low amount that is entirely reasonable. Timing can be very crucial, however, for people fighting with the means test as the numbers change every month unless your monthly income never changes.
For example, if you earn a bunch of your yearly earnings during the summer and need to file for bankruptcy in the fall, the court may see a substantial income that makes it think you need to be in Chapter 13.
You may need to wait in order to pass the means test. It is important not to guess whether or not you are eligible and get in touch with a trained professional to best protect your rights.
The second situation where it may make sense to file Chapter 13 is that you are behind on your mortgage and want to save your house. If the bank will not work with you, Chapter 13 can give you up to five years to catch up on the arrears.
Hopefully, loan modifications are on the rise so that more options exist for people desperate to stay in their homes, but Chapter 13 is always available as an avenue to keep your house.
A third situation that may call for a Chapter 13 Bankruptcy is if you want to save your car. If you are behind on your car, Chapter 13 can be a valuable tool in giving you the time you need to make up late payments and keep your car.
If you owe more on your car than it is worth, Chapter 13 also allows you to pay the market value of the car as opposed to the loan amount. This is another significant advantage for people considering Chapter 13 bankruptcy and are having problems with their car payment.
A fourth situation where you may want to think about Chapter 13 is if you owe debts that Chapter 7 won't discharge. Taxes, domestic support obligations, student loans and some other debts are not normally discharged in Chapter 7.
Chapter 13 can be of great help by providing the protection of the bankruptcy court while giving you up to 5 years to pay off these debts.
If you are considering bankruptcy and you are wondering whether Chapter 7 or Chapter 13 is right for you, consider these points as you speak with an attorney. Be prepared for your attorney to explain the differences between the chapters and provide a bit of advice on how to proceed.
Chapter 7 is heavily preferred and should be the choice unless there is some reason Chapter 13 is required or preferred.
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