How to Choose Which Bankruptcy Chapter to File

Step-by-Step Guide

1. 1

   Step 1: Identify personal bankruptcy chapters.

   Most people filing for a personal bankruptcy pick between a Chapter 7 and a Chapter
   13.
   
   There are key differences, which you should learn about before choosing.
   
   Chapter
   7.
   
   With a Chapter 7, you can wipe out any unsecured debts incurred before you filed for bankruptcy. (An unsecure debt is not backed with collateral.) However, this discharge comes with a price.
   
   A trustee will seize your property, sell it, and distribute the proceeds to your creditors.
   
   Accordingly, you could lose your house or car.
   
   Chapter
   13.
   
   A trustee doesn’t take your assets in this bankruptcy.
   
   Instead, you come up with a repayment plan that lasts three to five years.The amount you repay will depend on your income, assets, and debts.
   
   If you make your payments according to the plan, any unpaid unsecured debts will be discharged at the end of the repayment period.Depending on the circumstances, you may also be able to remove junior liens on secured property or reduce the principal.
2. 2

   Step 2: Check your state’s exemptions.

   Although the trustee can sell your property in a Chapter 7, your state probably has exempted certain property.
   
   This means the trustee can’t take it.
   
   You should research your state’s exemptions, which you can find online.In some states, you can choose to use either your state’s exemptions or federal exemptions.
   
   For example, a state might exempt $5,000 of value in your car.
   
   If your car is worth $5,000 or less, the trustee can’t take it.
   
   If your car is worth $7,000, then the trustee can sell it, but you get $5,000 back.
   
   The trustee distributes the remaining $2,000 to your creditors.
   
   States have all kinds of exemptions, including homestead exemptions that can shield some or all of the value of your home.
   
   For example, in Maryland, you can exempt up to $22,975 of equity in your home.If your home is worth $200,000 and you have an $80,000 mortgage, you have $120,000 in equity.
   
   Some states also have “wildcard” exemptions.
   
   This is an amount of money you can apply to any asset. , Once you have identified your state’s exemptions, go through your assets and see what you can exempt and what you can’t.
   
   If you don’t have many non-exempt assets, you are probably better off filing Chapter 7, which will wipe out your debts quickly.
   
   However, if you have non-exempt assets you want to keep, you’ll probably want to pursue a Chapter
   13. , Give special consideration as to whether you can shield your home.
   
   A Chapter 13 is usually best if you want to keep it.
   
   You must stay current on your mortgage payments.
   
   However, any overdue payments (called “arrearages”) can be spread out over your repayment plan.You don’t have the option of spreading out arrearages in a Chapter
   7.
   
   A Chapter 7 also only provides temporary relief from a foreclosure.
   
   When the bankruptcy ends, your bank can start up the foreclosure process.
   
   Furthermore, the trustee can sell your home in a Chapter 7 bankruptcy if you have equity in it (meaning it is worth more than the amount of the mortgage).
   
   A Chapter 7 makes sense only when you are upside-down on your mortgage or if the amount of equity you have is covered by a state exemption. , You can discharge certain debts in a Chapter 13 that you can’t in a Chapter
   7.
   
   Look for the following types of debts, which you can get rid of in a Chapter 13:debts incurred to pay tax obligations that weren’t dischargeable debts incurred as part of a divorce decree or separation agreement (not including alimony or child support) any debt for willfully and maliciously damaging another’s property loans from your 401(k) or other retirement account homeowners’ association fees incurred after you file for bankruptcy some government penalties and fines , The federal government has reserved Chapter 7 for those who truly cannot pay their bills because they don’t have enough money left over at the end of the month.
   
   To qualify, you must pass a “means test.” If you don’t pass, you’ll need to file for a Chapter
   13.
   
   You automatically pass the means test if your income for the six months before you filed is below the median in your state for a family of your size.You can find your state’s median by checking here: https://www.justice.gov/ust/eo/bapcpa/20161101/bci_data/median_income_table.htm.
   
   If your income is above the median, then you still might qualify for a Chapter
   7.
   
   You need to deduct allowed expenses from your monthly income.
   
   If the amount remaining is below a certain limit, you qualify.
   
   You can use a calculator at the Legal Consumer.com website: https://www.legalconsumer.com/bankruptcy/means-test/.
   
   Also consult with an attorney. , Chapter 13 limits the amount of debt you can have.
   
   If you go over, you must file a Chapter 11, which is rare for individuals.
   
   For example, you can only file for Chapter 13 if your debt doesn’t exceed the following:$1,184,200 in secured debts $394,725 in unsecured debts , A Chapter 7 is ideal of cleaning out debts quickly.
   
   The entire process takes only a few months from start to finish.By contrast, you will be paying off creditors for three to five years in a Chapter
   13.
   
   Furthermore, the bankruptcy judge can dismiss your case if you miss a payment during your Chapter 13 repayment plan.
   
   This means you won’t receive a discharge of your debts.
3. 3

   Step 3: Determine if you want to save non-exempt assets.

4. 4

   Step 4: Decide if you want to save your home.

5. 5

   Step 5: Analyze your types of debt.

6. 6

   Step 6: Check if you qualify for a Chapter 7.

7. 7

   Step 7: Calculate your debts.

8. 8

   Step 8: Check whether you need quick relief.

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