What is Bankruptcy, and is it right for you?

Although most people have heard of bankruptcy, many are unaware of what it actually means. In the simplest of terms, bankruptcy is a way for individuals and families to start fresh by relieving the burden of debt. There are different types of bankruptcies depending on the type of debtor and the type of debt, and these different bankruptcies are divided into different chapters of the Bankruptcy Code. Generally, Chapters 7 & 13 are the two chapters of the Federal Bankruptcy Code that are most appropriate and common for individuals or couples burdened by consumer debt.

Chapter 7
Chapter 7 is the most common form of bankruptcy because it is the easiest, fastest, and most cost-effective way to discharge debt. In a Chapter 7 bankruptcy, certain assets are liquidated and sold for benefit of the creditors. Importantly, in a Chapter 7 bankruptcy, many of an individual’s assets are considered exempt up to a certain monetary amount, like your house, your car, and other personal and household belongings. This means that, under certain conditions, individuals can retain important assets while also relieving crushing debt. However, bankruptcy in Chapter 7 liquidates and sells your non-exempt assets. If an individual has defaulted on a house or car payment the court may sell these assets for the benefit of creditors while the debtor keeps the monetary exemption set by the Code. For example, if an individual has missed car payments and the court sells the car that individual will keep $7,500, the maximum amount for a car exemption under Oklahoma law.  The benefit of this process is that the debts burdening the individual are discharged, and debtors under a Chapter 7 will have a fresh start after discharge.

Another advantage of filing chapter 7 is the speed of resolving the case. A debtor who files under this chapter is generally able to receive a discharge within approximately 90 days of filing. Chapter 7 is a viable option.

To qualify for a Chapter 7 bankruptcy, you must pass the means test.

Although Chapter 7 is often the ideal chapter to file bankruptcy under, not everyone is able to qualify for Chapter 7 debt relief. In order to file under this chapter, an individual must pass what is called the “means” test. This test is based on the income or incomes of the individual or couple filing for bankruptcy. To qualify for a Chapter 7 liquidation bankruptcy, individuals or spouses must show that their income for the six (6) months preceding the filing of bankruptcy is at or below the median income set by the bankruptcy code for their state.

If an individual fails to meet the requirements of the means test, he or she may file for relief under Chapter 13 of the Bankruptcy Code.

Chapter 13
This Chapter is often referred to as the “reorganization” chapter. The basic idea of a Chapter 13 bankruptcy is that the court will put a debtor on a payment plan using different formulas that depend on an individual’s ability to pay. In Chapter 13, an individual’s debts are typically paid out over the course of sixty (60) months, or five (5) years. This Chapter is a good option for those who are unable to pass the means test. It is also ideal for individuals who desire to retain possession of their house and/or vehicle despite having defaulted on payments. Instead of surrendering assets and keeping the monetary exemption amount, the individual opts to pay off these debts in simple monthly payments over the course of the bankruptcy. However, unlike a chapter 7, the case lasts for roughly five (5) years before the individual receives a discharge.

What is right for you?
Ultimately, the decision of whether to file bankruptcy or which chapter is best suited to your situation depends on many variables unique to you and your circumstances. Bankruptcy is one of many means to get a difficult debt situation under control. If you are struggling with debt and finding it impossible to keep up with your bills, call us today for a free consultation!

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