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A FEW BANKRUPTCY FACTS
Are you a debtor probably mauling over
whether or not to file for bankruptcy, or
, even more significantly, perhaps, how
to afford it? Knowing some of these
FACTS may, perhaps, interest you.
A few bankruptcy facts that may be of
interest to you.
Did you know that:
Are you a debtor probably mauling over
whether or not to file for bankruptcy, or
, even more significantly, perhaps, how
to afford it? Knowing some of these
FACTS may, perhaps, interest you.
A few bankruptcy facts that may be of
interest to you.
Did you know that:
- A total of 1,064,927 personal bankruptcies (Chapters 7 & 13) were filed in the United
States in the year just ended, 2008, up from 801,840 the year before - the highest
annual filings so far since the tough new Bankruptcy law of October 2005 almost shut
down the avenues for debtors to file bankruptcy
- Business bankruptcy filings were 38,540 in 2002.
"You have to pay for
Chapter 7 legal fees
upfront in cash. [Legal
fees being too high for
the average debtor],
You can be too poor
to go bankrupt."
-- Robert M. Lawless,
Professor of Law at
the University of
Illinois College of
Law.
Chapter 7 legal fees
upfront in cash. [Legal
fees being too high for
the average debtor],
You can be too poor
to go bankrupt."
-- Robert M. Lawless,
Professor of Law at
the University of
Illinois College of
Law.
| Having the KNOWLEDGE, Knowing the TRUTH & THE FACTS About Bankruptcy, Will Free You From Your Debt Burden - and the Stranglehold of 'the Law.' |
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Attorneys charge an average of from $150 to $200+ "per hour" in legal fees for
personal bankruptcy, translating to an average of $2,000 to $3,500 for the most simple
type of Chapter 7 bankruptcy.
personal bankruptcy, translating to an average of $2,000 to $3,500 for the most simple
type of Chapter 7 bankruptcy.
- Before the restrictive BAPCPA bankruptcy "reform" law in 2005, some 40 to 50 percent of
all personal bankruptcy cases were filed in various federal bankruptcy jurisdictions
like New York, California and others, by debtors who file PRO SE (i.e., personally,
without using or being represented by lawyers).
- Even with the tough new bankruptcy law of 2005 which was enacted with the
support of the organized bar and the banking and finance industries, and had
made it far more difficult for individuals to file for bankruptcy, at least 20 to 30
percent of Chapter 7 bankruptcies are STILL being filed personally TODAY
by debtors themselves without a lawyer, and more than that number in many
urban areas of America, such as Los Angeles and New York. (It had been up to 50%
in the pre-2005 law period, remember, but recent report is that it's now growing
back up to the previous higher numbers).
- The federal government's U.S. Government Accountability Office (GAO) found
that the attorney's fees for Chapter 7 bankruptcy (for the simplest type in that
category) had increased 51% since the new bankruptcy law of 2005 was enacted.
SOME BASIC BACKGROUND INFORMATION
ON BANKRUPTCY THAT WILL INFORM YOU
A. What is Bankruptcy?
Bankruptcy is, in brief, a judicial procedure undertaken by a person who owes debts "up to his ears"
and is being overwhelmed by it, to legally free ("discharge") himself of those debts - except for
those debts and obligations that come under the category of debts classified as non-dischargeable
debt under law. Bankruptcy is a federal (not state) matter. To secure bankruptcy, however, you
would have to prepare a bankruptcy "petition," along with all the required supporting documents for
it, detailing your financial condition and why you deserve to be freed of your debts. Then you'll file
these papers with the Federal Bankruptcy court of your area. When the court considers petition and
approves it, you are home free—discharged of all your (dischargeable) debts!
B. What Could Lead One to Contemplate Filing for Bankruptcy?
Studies on the subject identify these factors as the most common reasons why individual debtors
file for bankruptcy:
- Unemployment
- Large medical bills and expenses
- Seriously overextended credit
- Marital problems;
- Other large unexpected expenses
A Harvard study published online in February 2005 by Health Affairs, reported that half (50.4%) of
1,458 personal bankruptcies that were filed by American debtors in the year 2001, were caused by
illness and medical bills, and that such bankruptcies affect about 2 million Americans annually - that
is, when you include, as well, their dependents, including about 700,000 children.
Experts point to the following factors as some of the major causes which
lead to debtors filing bankruptcy:
- today's era of "buy-now-pay-later" business ethic, high-pitched advertising that constantly
whet the consumerist appetites of the vulnerable public, - the proliferation of unsolicited and easy granting of
costs, cost of fuel, food, etc
- rising rate of inflation and escalating costs of living,
- growing joblessness,
- marital instability and high rates of divorce among
- Rise in one-parent run families and households,
For these and other reasons, it is not uncommon
nowadays for decent and moderately well-to-do citizens or
corporations to find themselves in growing financial
difficulties. As the financial needs and costs keep growing
and the bills just keep piling up, no matter how hard one
tries to pay them off, one soon finds that what one needs
to pay out simply piles up much faster than one would ever hope to catch up with - more especially
when what the debtor would need to pay is no more just the original principal borrowed, but the
rapidly escalating interest and penalty charges imposed on the debt.
Do you, perhaps, find yourself in this kind of a growing financial bind?
You may, yourself, perhaps, find yourself in such a bind. It may be due to a variety of changes in
your circumstances: a divorce or separation in your life which drives the average person further
down the poverty line because of legal fees, child support or alimony payments, loss of job from the
emotional upsets of a broken home, and the costs of having to maintain two homes or sets of
children. It may be because of a prolonged period of unemployment, or because of a prolonged
state of health catastrophe, such as illness and the associated medical costs plus loss of income
that comes with that, or because of a natural disaster. Or, it may be because of rising costs of living
or plain living beyond your means, or of a business failure. It may be for reasons of excessive
indulgence in alcohol or gambling, or for any number of assorted reasons. But whatever the
specific reasons, the actual factual reason or reasons may indeed be irrelevant at the
moment. All you know—and care most about at the moment—is that each time you turn
around, it is yet another bill in the mailbox, or another threatening phone call or letter,
another summons to come to court.
The best efforts you've been making to clean out your bills just haven't been enough!
You have now reached that stage in your life where you are afraid to pick up the telephone—it just
may be one of those threatening collection agents, again, you tell yourself!! You now shy away from
your friendly mail man, or from calling at your local post office—it just might be one of those
summonses for an overdue bill, or one of those notices that your property or salary will be attached.
You wonder how much longer you have to drive your car before it is repossessed or seized by a
creditor, or how much longer you can live in your apartment before you are evicted or the house
foreclosed.
Well, if you have come to this unenviable stage in your life, there's probably only one question to
which you would want an answer: WHAT DO YOU DO?
There are, of course, some other alternatives you can pursue. But one such alternative— which, by
the way, has been gaining increasing popularity and respectability in recent times even within the
"honorable" and "conservative" circles of America—is spelled B-A-N-K-R-U-P-T-C-Y.
C. What Bankruptcy Can Do Regarding Your Debts
For all practical purposes, bankruptcy (much of the comments here is aimed at Chapter 7), will
"discharge" (i.e., it will wipe out and relieve you of) almost all the personal debts or financial
obligations you have (all, except for a few debts which are of the so-called "non-dischargeable"
type). As a legal matter, when you secure bankruptcy (Chapter 7), it means you are now freed of all
(or just about all) of your debts, and are now at liberty to make a "fresh start" in life unburdened by
past debts. You become, in effect, akin to a person whose death sentence is commuted by a
Governor or the President—a person granted a whole "new lease on life"!!
From the moment the bankruptcy judge puts his signature to the court order discharging you from
your debts (or, even long before that with respect to certain types or debt or obligations, after the
"automatic stay" protection of your bankruptcy filing kicks in promptly upon your filing for
bankruptcy), with a few exceptions, even some of those court judgments which had been obtained
against you for indebtedness, become automatically "void" or "voidable"—that is, they stop having
any further legal effect or validity against you—on all those debts covered by the discharge order.
From that minute on, your creditors are prohibited, by law, from starting or continuing any court
action or collection efforts of any kind against you personally on the discharged debts. Meaning,
they can't, for example, contact you or try to collect on those debts by, say, telephone calls, letters,
personal contacts, garnishee, seizure or threats of seizure of property, or what have you. Not any
more!
Indeed, the relief and protection the debtor gets in respect to bankruptcy filing, starts flowing to the
debtor a little earlier—i.e., even before the judge gets a chance to look over his or her case and
decide on it. Traditionally, under the old bankruptcy law (Section 362 of the bankruptcy code), the
operative law has generally been that, with a few minor exceptions, even where all that a debtor
has done is simply to have filed a petition for bankruptcy, his creditors are "automatically stayed"
from demanding payment or in any way trying to collect. In plain English, what this meant was that
generally, once you had filed a bankruptcy petition with the court, you immediately come under the
protection of the bankruptcy law; your creditors must stop all court actions and cannot attempt to
collect from you as of that minute - till the court decides on your petition as to whether to discharge
you of your debts, wholly or partially, or otherwise.
Under the new bankruptcy law that came into effect in 2005, however, there is a significant change:
the "automatic stay" of action which used to be truly "automatic" immediately following the filing of a
bankruptcy petition under the old law, is not quite as "automatic" any more as it used to be. Rather,
under the current system, the law now permits that, given certain circumstances, the bankruptcy
court may quickly "lift" (i.e., remove) the automatic stay, upon the creditor filing a "motion" or
demand in court against retaining the automatic stay based on certain grounds. (The new limitations
placed on the scope of the operation of the automatic stay in bankruptcy, are treated elsewhere in
this website, and/or in the Bankruptcy Handbook that is marketed or recommended by this site.).
D. Certain Types of Debts May Not be Discharged in Bankruptcy
Note that NOT all types of debts are dischargeable in bankruptcy, however. Under Section 523 of
the Bankruptcy Code, certain special types of debts may not be discharged in bankruptcy. Briefly
stated, even if you file for bankruptcy and receive a bankruptcy discharge from your debts by the
court, there are still certain types of debts which, if you were to owe them, will still remain owing
and due as your legal obligation under the law. And these are the so-called "non-dischargeable"
debts. As a rule, however, only a tiny percentage of debtors do have this type of debts in any
significant amounts. If a debtor has these so-called non-dischargeable debts, the judge would
simply discharge him from the other debts (the dischargeable type debts), and leave the non-
dischargeable ones standing as still owed.
E. Should You File for Bankruptcy?
In the final analysis, the question of whether you should or should not file for bankruptcy is going to
be all up to each individual. It's YOUR own personal financial decision to make. It would all depend
on your particular circumstances and the course you personally want or prefer to take. Our primary
objective in this website, is a rather less complex one: merely to provide you basic information and
to bring to your attention the fact that bankruptcy is a legal option which is available to everyone—
to you, just as well. If you have reached a point where you are literally being choked by debts, and
you truthfully and honestly have no means or hope of ever meeting the debt repayment, this (i.e.,
bankruptcy) is clearly one perfectly legitimate and major avenue of relief that you may consider and
explore, among any others available. Bankruptcy may not be the only option. Or, perhaps, even the
first option that you may, or should consider. But it certainly is, and should be, an option. An
important one! One constitutionally granted, by the way,of course!!
Bankruptcy is not just for the ‘fat cats’! It’s also for the ‘little guy,’ as well!
There is one basic reality you ought to bear very clearly in your mind in this day and age. And that is
this: that, contrary to the old stereotype of bankruptcy as something which only the cheats or the
social derelicts do, declaring bankruptcy is commonly viewed today as merely a means of trying to
survive by using one of the few legal ways available for settling one's financial problems.
If in deed you legitimately qualify for bankruptcy—which is to say, if you honestly lack the money or
income to meet repayment of a debt obligation you have—then, it's difficult to see what could
pragmatically be wrong or antisocial about doing what the law says you may legitimately do to free
yourself of the problem. It's that simple!
But watch this! It's really amazing. Do you notice the common attitude of, say, the lawyers, the
corporate executives or financial experts these days, society's most skilled and sophisticated
wizards of money management, towards a slightly different kind of bankruptcy - corporate
bankruptcy? Almost always, these professionals would view bankruptcy first and foremost as merely
a tool of sound financial management. To them, moralizing about bankruptcy immediately brings to
mind the image of the naive, stupid "moral theorist" who would sit around and give you an
argument on whether it is "right" or "wrong" to do what is (legally) necessary to stay alive! Notice,
for example, the speed with which these professionals would often recommend bankruptcy to their
corporate clients or associates, or undertake one themselves, the moment a business concern
shows some "warning signals" of failing or of "insolvency"!!
The point simply is that when you get down to it, bankruptcy is simply a legally sanctioned way of
trying to make the best of an already lousy situation. So you owe a lot of debts and can't pay? Bad
news, even tragic news! But what are you supposed to do? What's the solution? Is it to go without
food, shelter or clothing, because you have no money; or to go kill somebody, commit suicide, or rob
a bank because you can't pay? The point, simply, is that morality and code of ethics just have
nothing to do with bankruptcy. Absolutely none. It's a pragmatic, self-survival matter. People do it
because—and mostly when—they have no other real alternative. And, in any event, the law says it's
the right and privilege of every American who honestly qualifies.
Here's how one experienced Florida attorney, Edward Siegel, summed it up:
"Thirty or forty years ago, bankruptcy was a nasty word that conjured up visions of
immoral deadbeats cheating innocent creditors. Not anymore. Bankruptcy proceedings
have become commonplace, if not fashionable, these days, and there's no longer the
dreaded stigma that was once attached. If you're way over your head in debt, and
have been trying, unsuccessfully, to keep the wolf away, you've probably glanced
furtively in the direction of (bankruptcy)."
By 1990 alone, an estimated 12 million Americans, for example, have had to file personal bankruptcy
alone, since the major 1936 revision of the bankruptcy law, not counting those who filed under
business and other categories of bankruptcy. Nationally, the number of bankruptcies has increased
more than 1,000 percent on an annual basis within the last 20 years. In 1946, for example, the
number of consumer or personal bankruptcies was a mere 8,566 for the nation. But by the year
ending June 30, 1979, the number had skyrocketed to 196,976. For the year 1990, the latest as at
the time this account was taken, an estimated 718,000 individuals were said to file! In an area like
Southern California and some parts of New York, within the decade that ended in 1990, the rate of
personal bankruptcy had skyrocketed over 200 to 300 percent per year. And, the rate had
accelerated even more in the years after that - until the restrictive the "Bankruptcy Abuse
Prevention and Consumer Prevention Act of 2005" (BAPCPA) law of 2005.
So, don't worry folks! You're not likely to be alone anymore!! Americans are fast realizing that filing
for bankruptcy is for everybody, rich or poor—much like filing one's annual tax returns!
Attorney Gerald Mann, the former head of the Legal Services Division of New York's American
Federation of State, County and Municipal Workers, once put it so well some decades ago:
"The Federal bankruptcy laws are a form of consumer protection... (and) individuals
are beginning to realize that it's no more dishonorable for them to go into bankruptcy
than it was for the Perm Central or W.T. Grant [corporations]."
THE TWO BASIC TYPES OF PERSONAL BANKRUPTCY: An Overview.
NOTE: This same information, and/or the substance thereof, is already contained, for your own
information and understanding, in the NOTICE already given you by this Site, meant for you to have
read already by now. Please read it in full (or, if you’re yet to do it for the first time, then do so now).
CLICK HERE.
There are basically TWO main types of personal bankruptcy (among a few other types of bankruptcy
that target other areas) that almost always apply to consumer debtors - Chapter 7 bankruptcy, and
Chapter 13 types. These are the two types of bankruptcy that our Afford-Bankruptcy.Com
bankruptcy program is meant for, and designated to provide debtors assistance for. Chapter 7
basically permits you to "discharge" (wipe out) most of your debts, except that you'll have to give up
any property that you own, if in fact you have any, which are not "exempt" property allowed under
the bankruptcy law. And, in contrast, in Chapter 13 bankruptcy, you commit to repaying all or a
portion of your debts under a re-payment arrangement that will have the bankruptcy court
supervise the payment plan over a period of time, but you’ll be allowed to keep all of your property
regardless of its value.
As stated above, this website is primarily concerned with two basic types of bankruptcy: A) Straight
or "Chapter 7" bankruptcy; and B) Debt Repayment Plan or "Chapter 13" bankruptcy. And for each
of these, there are two broad categories of bankruptcy—personal bankruptcy and business
bankruptcy. Personal bankruptcy also go by the names "consumer," "individual" or "non-business”
bankruptcy. We are mainly concerned here with PERSONAL—as opposed to business or corporate
bankruptcy.
A. Type 1—Straight or Chapter 7 Bankruptcy
Basically, in a "Straight" Bankruptcy case (it's also known as a "Chapter 7" or "liquidation"
bankruptcy), the court may take any property or assets the debtor owns (assuming he has any),
and sell them for use for the benefit of his creditors, except for those kinds of assets he owns which
are "exempt" property under the law, meaning the type that are exempt from being liquidated by
the court or seized by the creditors. Proceeds from any such liquidated assets, upon being done by
the court (usually through the court official that supervises such matters in bankruptcy, called the
“trustee”), will be distributed to the debtor's creditors, and the debtor is then "discharged" (freed)
of his debts and would have no further legal obligation regarding any of his dischargeable debts. Of
course, if the debtor has NO assets that can be seized or liquidated in the first place—or, as it most
frequently happens, if the assets he has consist only or largely of "exempt" type assets—then the
debtor will still keep all his belongings (with his debts also discharged), while the creditors get
absolutely nothing.
Most debtors who contemplate filing for bankruptcy should know that it is in the "straight" or
Chapter 7 type of bankruptcy that the vast majority of cases, over 85 percent of the personal
bankruptcies, are filed — the so-called "no-asset" debtors who basically have no assets that
creditors many seize, ant just want to clear themselves of their debts completely so they can have a
"fresh start" and move on with their lives.
Basically, the reason that most debtors who have a choice of option generally opt for Chapter 7,
essentially has to do with the fact that it is relatively less expensive, and fast and simpler to file
(could generally get done and finished only within 3 to 6 months, from start to finish), and unlike
Chapter 13 which could have you making payments on your debts for some 3 to 5 years, Chapter 7
does not require payments over time; in addition, few filers actually lose any significant personal
property or asset in Chapter 7 for the reason that the "exemptions" (property which are designated
as being exempt from being seized by creditors) that the law allows the average debtor are
generally sufficient as to allow the filer to keep most of the essential necessities to carry on life after
bankruptcy.
B. Type 2— Debt Repayment Plan or Chapter 13 Bankruptcy
Basically, in a Debt Repayment bankruptcy situation (it's also known as a "reorganization" or "Debt
Adjustment Plan," or more simply, a "Chapter 13" bankruptcy), the debtor works out a proposed
debt repayment arrangement (a "Plan") with his creditors under the supervision of a court-
employed trustee, in which he offers to repay his debts out of his future regular earnings over a
period of 3 to 5 years. The court then orders an "automatic stay" on (i.e., a prohibition against)
further collection efforts and no late payment or interest charges by the creditors, though it adds on
its own "administrative charges" of an average of 10% of the repayment value to what you have to
repay. Then, through a court worker called the trustee, the court supervises the debtor's
repayments over an extended (usually 3 to 5 years) period of time.
C. The Advantages of the Chapter 13 Type Bankruptcy
Filing a Chapter 13 bankruptcy has certain benefits. Some of these are as follows:
i) It stops creditors from harassing the debtor, at least for as long as the debtor continues to meet
the payments worked out under the repayment plan.
ii) The debtor has a chance to get some of his creditors who fall under certain kind of category to
accept only a fraction (say 20 or 40%) of his indebtedness to them. Repayment is stretched out over
a period of 3 or 5 years, after which the debtor gets a complete discharge from the totality of the
debts, except for those which are classified by law as non-dischargeable debts, if any apply to him.
EXAMPLE: Say a debtor's financial profile indicates that the debtor won't have any projected
disposable income left after he shall have paid in a Chapter 13 plan certain mandatory types of debt
(e.g., back child support obligations), the judge could approve a repayment plan that doesn't repay
any of the debtor's credit card debts. As a general rule, most credit card, medical and legal debts, for
example, would be 100% chargeable in Chapter 13 bankruptcy, as are most loans and court
judgments against the debtor
iii) The Chapter 13 bankruptcy does not normally anticipate liquidation of the debtor's nonexempt
property. Meaning that the debtor would usually keep possession and ownership of almost all of his
assets during the period of the repayment plan, and continue to run his business, own and live in
his expensive home, or drive his car, as may be applicable.
iv) Through the supervision of the court (usually the trustee), the spendthrift debtor could, in theory
at least, be disciplined to become better able to manage and handle his finances in the future.
v) Certain types of debts which are non-dischargeable under straight (Chapter 7) bankruptcy, are
dischargeable under Chapter 1 3 bankruptcy— e.g., loans obtained through giving false financial
statements, parking tickets, etc.
v) Generally, for a home owner threatened with foreclosure, filing for Chapter 13 lets him (her) keep
his home, and a car owner facing repossession to keep his car, as he catches up on his missed
payments
EDUCATE
YOURSELF
FIRST, GET
INFORMED ON
BANKRUPTCY!
"Most debtors who file a
bankruptcy
petition...know very little
about the bankruptcy
process....debtors,
creditors, judiciary
employees, and the
general public [need to
be provided] with a basic
explanation of
bankruptcy and how it
works." -- Leonidas R.
Mecham, Director, Admin.
Office of the U.S Courts.
YOURSELF
FIRST, GET
INFORMED ON
BANKRUPTCY!
"Most debtors who file a
bankruptcy
petition...know very little
about the bankruptcy
process....debtors,
creditors, judiciary
employees, and the
general public [need to
be provided] with a basic
explanation of
bankruptcy and how it
works." -- Leonidas R.
Mecham, Director, Admin.
Office of the U.S Courts.
D.The Disadvantages of the Chapter 13 Type Bankruptcy
The Chapter 13 bankruptcy does have certain important disadvantages. They include the following:
i) In a Chapter 13 bankruptcy, the debtor would have to repay most, or at least some, of his debts. In a
Chapter 7 (straight) bankruptcy, on the other hand, he repays practically nothing. Yet, the law does not
make any differentiation between a person who files under Chapter 13 and another who files under
Chapter 7 in terms of how they are treated or viewed on the record in credit matters. For example,
Section 312(b) of the 1978 Bankruptcy Code provides that credit reporting agencies may carry all
bankruptcies, both Chapter 7 and Chapter 13, on the books, including Chapter 13 cases, for 10 years
after the petition is filed.
ii) Under certain circumstances, a debtor who gets a discharge of his debts through Chapter 13
bankruptcy, may not be allowed to file for straight bankruptcy for the next 8 years. He may not be
allowed to do so unless the payments he made under the Chapter 13 case amounted to at least 70% of
all the allowed unsecured claims, and unless the Chapter 13 plan was "proposed by the debtor in good
faith" and was "the debtor's best effort."
iii) The Chapter 13 proceedings are more cumbersome and more time consuming, requiring more
paperwork than Chapter 7; they are more expensive (lawyers would charge an average of $4,500 or
more for Chapter 13, as compared to $2,500 for Chapter 7); and, on top of that, there's one other extra
expense that will be involved in filing for Chapter 13 – it will cost a debtor an additional average amount
of at least 10 percent of all payments made under the plan, calculated as "administrative" expenses for
the chapter 13 case, and added to the total amount the debtor will repay.
iv) As of 1990, all student loans, which formerly used to be dischargeable in Chapter 13 cases, will now
be non-dischargeable under Chapter 13 for cases filed after November 5,1990 [U.S.C. 1328(a) as
amended in Public Law 101-508, Section 3007(b)].
F. Which of the Two Types of Personal Bankruptcy do you Choose?
Quite frankly, the stark reality of the matter, particularly under the current conditions brought about by
the new Bankruptcy Act of 2005, is that there is really no more real "choice" for debtors as to whether
to file for Chapter 7 or Chapter 13 bankruptcy. The choice of which of the two types of bankruptcy to file
under today, really boils down to one fundamental factor - and one fundamental factor alone: the hard,
cold, nitty gritty issue of dollars-and-cents, in terms of which one of the two types can you afford to
"choose"? Certainly, if your financial circumstances are absolutely terrible, and you are, say, unemployed
or merely earning some little unemployment insurance payments, or you lack any income at all, or your
debt burden is so high that it completely outstrips your income or your capacity to make any payments,
then making any sort of "plan" to repay anybody anything whatsoever may be difficult, perhaps
practically impossible and out of the question altogether for you.
Yes, you've probably gotten the point already: hard, cold cash, the practical means and ability to pay, is
what the "choice" is all about, baby; not morality or good intentions or personal preference!! Or, even
what it is that makes economic sense!!
Look at it this way. In the past, under the old bankruptcy law and practice which pre-dated the 2005
law, the majority of debtors who contemplated or filed for bankruptcy, went overwhelmingly for the
Chapter 7 type. With Chapter 7, they didn't have to make any payments on their debts, of course. But
the reason they could do that (i.e., take the Chapter 7 option), was fundamentally because the debtors
really had a choice under the then existing law - the rule under the old law, was that only the debtor
(and the debtor alone) had the sole right to choose to file under Chapter 13 bankruptcy and make some
debt repayments, if that was what he voluntarily wanted to do, and if he didn't want to file for Chapter
13, he couldn't be compelled to do so by the court or anybody. The new (current) bankruptcy law,
however, has effectively stripped debtors of that choice as debtors must now meet certain financial
"eligibility requirements" and pass an income-standard "means test" before they may be allowed, based
on a showing of a lesser income, to file under Chapter 7 bankruptcy. Otherwise, they'll have no "choice"
- they must file under Chapter 13 and make some repayments of their debt!
The point is that under the current bankruptcy system, you DON’T really have to concern yourself with
the question, 'which one of the two types of bankruptcy should I choose to file under.' That "choice" has
already been largely made for you by the law: your disposable income status result from your "means
test," would largely determine that issue for you as to which of the two categories you should, or must,
file under.
G. WHAT IF YOU DON'T QUALIFY FOR, OR CAN'T, FILE UNDER
CHAPTER 7OR 13. IS THERE ANY OTHER TYPE OF BANKRUPTCY YOU CAN
FILE FOR?
The answer to the question is: 'Yes, there is.' As fully explained in the preceding sections of this chapter,
the central concern of the manual is with the two basic types of "personal," or "consumer" bankruptcy
that are employed by debtors - the Chapter 7 or straight liquidation type of bankruptcy and the Chapter
13 or debt repayment type. But what if, for one viable reason or the other, you find that you can't or
won't be able to file under Chapter 7, and do not qualify to file under Chapter 13, what then? Is there
any other option for you under the bankruptcy laws?
FORTUNATELY, THE ANSWER IS, YES, THERE IS. There's still an option to file for one other type of
bankruptcy — Chapter 11 bankruptcy.
As can be seen from a review in this chapter of both the primary eligibility requirements for, and the
advantages and disadvantages of, filing under Chapter 7 and Chapter 13 above (see Sections A
through E of Chapter 3, and ), there are any number of reasons and conditions under which a debtor
may, on occasion, find it impracticable or financially ill-advised, or both, to file either under Chapter 7 or
13, and for which reason he or she may need to have a different bankruptcy option altogether. You can,
possibly, be kicked out of Chapter 7 because your income is too high, and then be unable to propose a
Chapter 13 repayment plan that the judge will find “confirmable” or acceptable.
Say, for example, you own a very expensive home or some other beloved property but one of highly
expensive quality, (e.g., an antique, a one-of-a-kind automobile or artwork) which you'd rather preserve
by filing for bankruptcy. In such a situation, you would probably (or typically) not be able to do so either
under Chapter 7 or 13. Chapter 7 will be outrightly out of the question for you in the first place, since
you own too much to qualify within it, while you may not be eligible to file under Chapter 13 because
you'll probably have unsecured amount of debt totaling in excess of the $336,900 limit or secured debt
amount in excess of the $1,010,650 limit permitted under the bankruptcy requirements. Or, say you're
not eligible (not allowed) to file under Chapter 7 because your current monthly income was considered
too high when you filed, but however, you happen not to have a steady income by the time you convert
to Chapter 13, and so that will mean that your proposed repayment plan won't be approved by the
judge, and so you can't file under Chapter 13, either!
Now, if you find yourself in such a predicament where you can neither file under Chapter 7 nor Chapter
13, there'll be just one other potential option you may want to consider and explore under the
bankruptcy laws. And that option would be to consider filing under Chapter 11 of the bankruptcy code.
To sum it all up in one word, the critical difference which Chapter 11 exclusively brings to debtors is that
it provides a debtor of above average upper income status, or one who has comparatively larger debts
and income or assets, such as substantial personal investments in real estate, securities or other
valuables, an avenue in bankruptcy to seek rehabilitation and reorganization of his or her financial
affairs — something neither Chapter 7 nor 13 can provide for one in such a situation.
As one experienced bankruptcy legal practitioner, Weldon Ponder, of Austin, Texas, once put it
"the limits of $250,000 in unsecured debts and $750,000 in secured debts for a Chapter 13
debtor, used to be reasonable [back in 1978 when the bankruptcy law was enacted]. [It's
now $336,900 in unsecured debts and $1,010,650 in secured debts since the October 2005
new law]. But nowadays (in the 1990's and beyond), a professional with some real estate
can easily go over them."
In sum, if you are a debtor with substantial, above average investments or assets in real estate or
stocks, for example, or middle or upper-income individual with enough assets to negotiate a repayment
plan with the creditors, but do not qualify or find it economically advantageous to file either under the
Chapter 7 or Chapter 13 type of bankruptcy, you may very well consider filing under a third option: the
CHAPTER 11 type of bankruptcy. And, under the current law, you will be quite eligible to file Chapter 11
as an individual, whether you are in business or otherwise, or a sole proprietor, a particular or private
entity—just so long as you are not a governmental unit or agency, a stockbroker or commodity broker,
or insurance company, or a banking institution.
Filing for Chapter 11 bankruptcy affordably, is really quite practicable. At least, it's not that much more
of a problem than you'll find in filing, say, Chapter 13 bankruptcy. You can find all the details you need
about filing for Chapter 11 in the handbook marketed and promoted in this website titled, HO W TO FILE
FOR CHAPTER 11 BANKRUPTCY FOR BUSINESS DEBTS, WITHOUT A LAWYER.
THE ELIGIBILITY REQUIREMENTS YOU NEED TO MEET FOR FILING FOR
BANKRUPTCY UNDER EITHER CHAPTER 7 or CHAPTER 13
As stated in Section…above, there are TWO main types of bankruptcy open to personal debt filers in
bankruptcy Chapter 7, and Chapter 13 bankruptcies.
The prime impetus and underlying purpose which guide the new bankruptcy law of 2005 and the
eligibility rules that control bankruptcy filing, is largely to find ways by which to get debtors to pay back
at least a part of their debts - if they are, in any way even minimally able to afford it. A purpose which
translates, in other words, to getting debtors, or, in fact, requiring them, to file for bankruptcy under
Chapter 13, rather than Chapter 7.
Below are a summary of the major eligibility rules and requirements which debtors seeking bankruptcy
must now meet under the new 2005 law in order to successfully file for bankruptcy or be able to obtain
a court’s order for bankruptcy discharge.
A. Eligibility Requirements for Chapter 7 Bankruptcy
1. Credit Counseling. Before you even file for bankruptcy (whether it be for Chapter 7 or for Chapter
13), one of the very first things you must do (aside, perhaps, from reading the material in this website
and other sources to get informed on the basics of bankruptcy!), is to have a formal consultation on
credit counseling with counselors at an approved non-profit credit counseling agency. You are required
to have done this WITHIN the 180-day period immediately preceding filing your petition for bankruptcy.
The purpose of this, is for them to explore with you, and to advice you of, any other practicable
alternatives that might be available for resolving your debt problem other than bankruptcy, including
working out a budget analysis of your finances, among other things. The list of the approved credit
counseling agencies are readily available for any debtor to obtain from:
1) the Bankruptcy Court that covers a debtor’s district or area; or 2) at the website of the U.S. Trustee
at this web site: www.usdoi.gov/ust. Click "credit counseling and debtor education" to see the list. Upon
the debtor’s completion of the program with them, the debtor is to obtain a Certificate of Completion
from the agency showing that he/she undertook such counseling, and submit same to the court later on
if he/she files for bankruptcy.
.
NOTE: One exception when you might be allowed to file for bankruptcy without having gone through
the credit counseling requirement, would be where you can certify to the court's satisfaction that you
need to file for bankruptcy on an emergency basis (say, for example, to stop an eviction, a mortgage
foreclosure, or a wage garnishment), or where you can certify that you tried but were unable to obtain
counseling within 5 days of your requesting one.
2. Figure out Whether You Will Be Financially Able To File For Bankruptcy,
in the First Place.
First, calculate your income status. If your determination (from this calculation you are to make) shows
that your "current monthly income" is MORE than the "median income" for the family size you fall under
for your state, here are the options you have:
Chapter 7, then you must first take what is known as the "means test" and pass it, to show
proof that you don't have enough "disposable income" to be able to fund a Chapter 13
repayment plan and repay some or all of your debts. If you fail to pass this test, then what
that means is that you're considered to have enough disposable income to be able to make
some repayments under a Chapter 13 Repayment Plan, and so doing a Chapter 7 is
practically out of the question for you.
If, on the other hand, your determination (from the initial calculation of your income status you are to
make) shows that your "current monthly income" is LESS than the "median income" for the family size
you fall under for your state, then here are the options you have:
determining how much "disposable income" you'll have left over to fund a repayment plan;
rather, you'd be allowed to use your ACTUAL expenses (which is generally higher relative
to the IRS-compiled figures) in calculating your disposable income. And, secondly, you'll also
be given the privilege of proposing a repayment plan that will last for only a 3 year period
(rather than the usual 5-year period).
For the information on the making of the above-listed "current income" and "means test" calculations for
determining your bankruptcy eligibility status, CLICK HERE.
3. You Must Be a Human Person or a Small Business.
To be eligible to file for Chapter 7 (or 13) bankruptcy as a "consumer" debtor, you must be a human
person (as opposed, for example, to a corporation) and a debtor the majority (more than 50%) of
whose debts are primarily consumer type debts - i.e., debts which are incurred primarily for yourself and
your family, rather than for a business. (On the other hand, non-consumer debts are debts, for example,
which come from the operation of a business, back taxes, or debts for personal injury or property
damage caused by the debtor). You must be an individual (or a husband and wife, if filing jointly), or a
sole proprietor
(If you are a sole proprietor of a business (or a sole proprietor filing jointly with a spouse who owns a
business), you can include all business debts on which you have personal liability, meaning that even for
your business debts, you can include them in bankruptcy since legally a sole proprietor is deemed one
and the same thing as his business entity, and so is personally liable for the debts of his business.
Similarly, the business debts of a business partnership for which you are a member, can also be
included in your bankruptcy as "consumer" debts — to the extent, however, that you (and your spouse,
if filing jointly) are personally liable. If you are a corporation, or a limited liability company, or a
partnership, you are to file, in stead, a "business" Chapter 7 bankruptcy).
4. You Must Not Have Had a Previous Bankruptcy Discharge within Certain Time
You are NOT eligible to file for Chapter 7 bankruptcy, if: you previously received a discharge of your
debts in a Chapter 7 bankruptcy within the previous 8 years, or a discharge in a Chapter 13 bankruptcy
within the previous 6 years.
5. You Must Not Have Been Barred By a Previous Bankruptcy Dismissal
You are ineligible to file for Chapter 7 bankruptcy, if: you had a previous bankruptcy case that was
dismissed within the past 180 days prior to your filing, based on any of the following reasons:
6. You Must Not Have Engaged in Certain Acts of Financial
Dishonesty with Your Creditors
Your Chapter 7 bankruptcy case may be challenged or dismissed, if your creditors, or the Trustee, makes
the case to the court which the court finds to be valid, that you've engaged in acts of dishonesty and
fraud, or in an act of dishonest intent on your part, towards your creditors -e.g., evidence that you've
tried to conceal property or money so you could keep them from going to your creditors; that you've
uploaded cash or assets to your friends or relatives to hide them from your creditors or from your
spouse in a divorce proceeding, or that you've run up large bills for high ticket items just before you had
to file for bankruptcy when you are clearly broke and knew (or should have known) that you could not
possibly repay the debts.
7. You Must Be Able and Ready to Provide Certain Required Documents
To file a Chapter 7 case, you must have at hand the following documents, among others, ready to
present them to the court at filing (or at least within 45 days after filing), or the case may be dismissed:
B. Eligibility Requirements for Chapter 13 Bankruptcy
1. Credit Counseling. Before you even file for bankruptcy (whether it be for Chapter 7 or for
Chapter 13), one of the very first things you must do (aside, perhaps, from reading the material in this
website and other sources to get informed on the basics of bankruptcy!), is to have a formal
consultation on credit counseling with counselors at an approved non-profit credit counseling agency.
You are required to have done this WITHIN the 180-day period immediately preceding the filing of your
petition for bankruptcy. The main purpose of this, is for them to explore with you, and to advice you of,
any other practicable alternatives that might be available for resolving your debt problem other than
bankruptcy, including working out a budget analysis of your finances, among other things. The list of the
approved credit counseling agencies are readily available with the Bankruptcy Court of each district or
area, or at the website of the U.S. Trustee at: www.usdoj.gov/ust. Click "credit counseling and debtor
education" to see the list. Upon your completion of your program with the agency, you are to obtain a
Certificate of Completion from them showing that you undertook such counseling, and submit same to
the court later on if you file for bankruptcy.
NOTE: One exception where you might be allowed to file for bankruptcy without having gone through
this credit counseling requirement, would be where you can certify to the court that you need to file for
bankruptcy on an emergency basis (say, for example, to stop an eviction, a mortgage foreclosure, or a
wage garnishment), or where you can certify that you tried but were unable to obtain counseling within
5 days of your requesting one.
2. Figure out Whether You Will Be Financially Able To
File For Bankruptcy, in the First Place.
First, calculate your income status. If your determination (from this calculation you are to make) shows
that your "current monthly income" is MORE than the "median income" for the family size you fall under
for your state, here are the options you have:
If, on the other hand, your determination (from this initial calculation of your income status that you are
to make) is that your "current monthly income" is LESS than the "median income" for the family size you
fall under for your state, here are the options you have:
forced into filing Chapter 13. (You will be allowed to go ahead with filing for Chapter 7,
unless the court were to find, after it shall have received a complaint from the U.S. Trustee,
that you are not, in fact, qualified to file for Chapter 7, because of uncovering of some fraud
of misrepresentation on your part — a scenario which does not happen too frequently) [ A principal
way this could, and may, happen, is for the court to find (following a motion filed by the court or the
U.S. Trustee and it deliberations on the facts presented) that allowing you to proceed with filing for
Chapter 13 would be an "abuse" of the bankruptcy system. Typically, this will happen if, later on when
you file your Chapter 13 bankruptcy petition, it turns out that your actual income that you had used in
working out your Means Test results, is actually significantly higher than your actual expenses].
be given the privilege of not having to use the IRS-compiled expense standards in
determining how much "disposable income" you'll have left over to fund a repayment plan; rather,
you'd be allowed to use your ACTUAL expenses (which is generally higher relative
to the IRS-compiled figures) in calculating your disposable income. And, secondly, you'll
also be given the privilege of proposing a repayment plan that will last for only a 3 year
period (rather than the usual 5-year period).
For the information on making the above-listed "current income" and "means test" calculations for
determining your bankruptcy eligibility status outlined above, CLICK HERE.
3. You Must Be a Human Person or a Small Business.
A business cannot file for Chapter 13 bankruptcy, and so to file for a Chapter 13 bankruptcy case, you
must be a human person (or a husband and wife, if filing jointly). You must include all your personal
debts. If you are a sole proprietor who owns a business, or a partner in a business with others, you can
include all debts of the business in which you have personal liability, meaning that even for your
business debts, you can include them in bankruptcy since legally a sole proprietor is deemed one and
the same thing as his business entity, and so is personally liable for the debts of his business. Similarly,
the business debts of a business partnership for which you are a member, can also be included in your
bankruptcy as "consumer" debts - to the extent, however, that you (and your spouse, if filing jointly)
are personally liable. Except, however, that in a Chapter 13 situation, you have to file the case in your
own personal name, and not in the business name used for the business, for the reason that technically
a business cannot file for Chapter 13 bankruptcy. There is one notable situation, though, when the
general rule that in Chapter 13 you may include all business debts as though they are personal debts,
does not hold - namely, when it comes to stockbrokers and commodity brokers. With respect to such
business entities, they may not file for Chapter 13 bankruptcy, even for personal debts. Finally, if you
are a corporation, or a limited liability company, or a partnership, you are to file, in stead, a "business"
Chapter 7 bankruptcy, or Chapter 11.
4. Your Debts Must Fit Within Certain Limits
To be eligible to file for Chapter 13 bankruptcy, your debt structure must fit strictly within the designated
legal limits. Your debts must NOT be in excess of (note that these figures change over time with the rise
in price index):
5. You Must Not Have Had a Previous Bankruptcy within Certain Time Limits
You cannot be discharged in a Chapter 13 bankruptcy case, if:
In other words, if you wish, you may go ahead and file for Chapter 13 in such a situation, but even if
you do, you still won't be granted a discharge from those debts until the stipulated time has passed.
6. You Must Be Current on Your Income Tax Filings
To be eligible to file for Chapter 13 bankruptcy (or, at least, to have the case processed by the court),
you have to be ready and able to provide evidence to the court that you filed your federal and state
income tax returns for the previous 4 years before your bankruptcy filing - e.g., by providing the tax
returns, or the transcripts of the returns obtained from the IRS. You must provide such proof no later
than the date set for your First Meeting of Creditors (usually following some one month or so after the
case is filed), and unless ultimately provided, the trustee may seek, and the court will usually grant, a
dismissal of the case.
7. You Must Be Able to Propose a Repayment Plan That Meets the Legal Requirements
To have a viable, successful Chapter 13 bankruptcy, you must have the financial ability and disposable
income sufficient to fund a proposed repayment plan that the court will find approvable ("confirmable").
WILL THE CHAPTER 7 BANKRUPTCY BE THE RIGHT
CHOICE FOR YOU?
A. Chapter 7
The Chapter 7 type of bankruptcy is sometimes called "straight" or "pure" bankruptcy in that it basically
permits you to "discharge" (wipe out or cancel) most of your debts so that you don't have to pay them,
except that you'll be required to give up property you own (if any) which are not "exempt" property
under the bankruptcy law. Chapter 7 acquired this name or reputation as the "straight" or "pure"
bankruptcy out of the general sense of the original, historical purpose of the American bankruptcy
system: namely, the unhindered ability of the average overburdened debtor to file for bankruptcy, and
to obtain almost total relief from their debts by the bankruptcy act from their debts and creditors in
order to get a "fresh start" in life. Summed up simply, the basic culmination of a Chapter 7 bankruptcy, is
that it results in the elimination of most of your debts so that you are no more liable for paying them,
and your legal protection from further efforts by creditors to harass you debtor or to collect on those
debts. And, by this, you are able to have a "fresh start" in your economic life without having to contend
any more with the burden of your past debts.
B. Some Reasons why Most Bankruptcy Filers File Under Chapter 7
In point of fact, historically, most debtors with a choice who file for bankruptcy, have traditionally opted
for Chapter 7 bankruptcy. In deed, compared to Chapter 13, Chapter 7 bankruptcy has been a widely
"popular" brand of bankruptcy, with at least 7 out of 10 debtors who file for bankruptcy opting for
Chapter 7. There are a few reasons for this:
require payments over time, and the filer comes out largely debt free (except for those secured debts
that are not dischargeable any way in bankruptcy, if you have any of them, such as student loans, child
support or recent back taxes). Technically, the whole process, from the filing of the Chapter 7 case to its
close, would take just 4 to 6 months to finish, compared to 3 to 5 years or so for a Chapter 13 case.
appointed by the bankruptcy court to handle the processing of the bankruptcy case on behalf
of the court, but who is not a judge. In contrast, a typical Chapter 13 case will require at least one,
often two or more, hassle-full, time-consuming court hearings with a judge before a repayment plan is
finally hammered out between the debtors, the trustee and the creditors, and becomes approved
("confirmed") by the judge, and then carried out by the debtor over the multi-year life of the plan under
the supervision of the trustee.
(Of course, as a person probably hugely indebted and short of cash but probably determined,
nevertheless, on seeking out the debt relief option provided by bankruptcy, if you've made the personal
decision to use the aid and assistance of a competent bankruptcy document preparer, or even of a good
self-help bankruptcy book - such as the one recommended and promoted by this Website - to do your
bankruptcy yourself, then the prospect of your having to shell out such horrendous sums as the ones
mentioned above, would be one problem you just wouldn't have to worry about, would it? And so, this
probably wouldn't be any worry of yours!)
C. When Chapter 7 May Be Right for You.
In general, all relevant things considered, the following will constitute an ideal circumstance when it will
make the most economic sense for you to file for Chapter 7 bankruptcy:
1. If you find that you're qualified NOT to have to take the Means Test, in the first place.
Basically, you meet this requirement, if: (1) At least 50% or more of your debts are classifiable as
"consumer" types of debt (consumer debts are defined as debts which are incurred primarily for yourself
and your family, rather than for a business); (2) your determination from the initial calculations you
make, shows that your "current monthly income" is LESS than the "median income" for the family size
you fall under (see the procedures for Monthly Income & Means Test calculations HERE); and (3) you are
certain in your own mind, that you are fully qualified to file for Chapter 7 because you know that NO
fraud or misrepresentation on your part can possibly be uncovered regarding the facts of your financial
condition that you filed or will file with the court in your bankruptcy petition papers.
CLICK HERE, for the information on making the above-listed "current income" and "means test"
calculations for determination of your bankruptcy eligibility status outlined above.
2. If the Bankruptcy Discharge you'll get will Actually Discharge Enough of Your Debts.
Under the bankruptcy law, there are certain types of debts - commonly referred to as "non-
dischargeable" debts - which cannot be discharged from bankruptcy, and will survive and still remain
your debt obligation even after you've had your bankruptcy discharge by the court, if you have those
kinds of debts. (See HERE for information on those kinds of debts).
Do you have those kinds of debts? And, more importantly, if you do, do such debts constitute a
major or large part of your debt burden? If you do not have those kinds of debts, or you do have them
but they do not constitute a significant part of your debt (or, getting rid of them is for you not really the
primary concern why you wish to file for bankruptcy), then filing for Chapter 7 bankruptcy may be right
for you.*
IMPORTANT: Note that under the bankruptcy law and procedures, there are certain times and situations
when certain debts which are, on paper, non-dischargeable debts, will be treated as dischargeable and
still be discharged in bankruptcy. See
3. If you Don't Have a Co-Signer Involved in Your Debt.
As a rule, in a Chapter 7 bankruptcy, if you have another person who joined with you as a "cosigner" in
a loan or other contractual obligation, and you are discharged in bankruptcy from that debt, you yourself
will become no longer liable for that debt, but your cosigner will still be on the hook for it and still remain
liable to repay the debt. Hence, if you do not have a debt involving a cosigner (or, certainly a cosigner of
the kind which you would want to get stuck with the debt, such as your treasured friend or beloved
spouse or relative), then that may be one important consideration existing for which filing for Chapter
7may be right for you.
4. If filing for Chapter 7 Won't Have You Lose Your Treasured Property
Under the bankruptcy system, the central idea for doing (Chapter 7 bankruptcy) is simply this: the court
will wipe out all or most of your major debts, but in return for that, you will give up to the Court (through
its main agent, the bankruptcy trustee), any property you own to be sold for the benefit of your
creditors, except for any such property among them that are "exempt" property designated by law as
not subject to such seizure by the trustee. The legal provisions which control and spell out what
property you can keep ("exempt" property), or lose (“nonexempt” property), in a bankruptcy case, are
called property "exemptions." Basically, property that is designated as EXEMPT property under the laws
of your state of filing, are property that can not be taken from you in bankruptcy (or you can pay the
trustee its equivalent value for it and keep it); and property that is designated as NONEXEMPT property
(if you have any), refer to property that can possibly be taken away from you and sold by the trustee to
pay your (secured) creditors.
The key to getting the best deal in respect to retaining your most treasured property in bankruptcy, is
rather simple. You'll need to use property exemptions to keep as much of your property as possible,
while discharging as much debt as you can. Turn to (CLICK HERE) for a list of the exemptions that may
be available to you. Does it appear to you that the bulk of your property is exempt - as is, in fact, the
case in real life situations with most debtors who file for bankruptcy? If that is the case with you, then
that would be one important consideration existing for which filing for Chapter 7 may be right for you.
(On the other hand, if it appears that you have a great deal of nonexempt property, or that filing for
Chapter 7 bankruptcy would not let you keep treasured property that you really want to keep, then you
may probably have to examine having to file for the Chapter 13 option. Chapter 13 let's you keep any
property you have, regardless of its exempt status or its value, as long as you will have sufficient
income to finance a repayment plan spread over the next 3 to 5 years for much of your "secured" debts,
and any "priority" debts you have, if any, in full.)
5. If you Wish to "Redeem" Property from The Trustee.
If you are current on your payments for a secured debt up to the time you file for bankruptcy (as
opposed to being in arrears on the payments), one way you can continue to hang on to the "secured"
property (i.e., the underlying property which secures the debt, such as the car, furniture, etc), if you
desperately wish to keep it, is by "redeeming" the property in a Chapter 7 bankruptcy - that is, by
buying it back from the creditor in a lump sum, rather than have the creditor take it and sell it to
someone else. A major advantage of the redemption of property approach, is that under the bankruptcy
law, you are allowed to redeem the property by paying the "replacement" value of the property - the
price you'll get for it today from a retail merchant, considering the age, wear and tear and current
condition of the property. (Note that the property involved, must be one used for (and the underlying
debt must be consumer debts on goods used for) personal, family or household purposes. That means
that you can't redeem property that secures business debts).
Redemption will be a great option for you if the debt you owe on the property exceeds the property's
current value, since this means that you'll be able to pay only the present worth of the property (what a
merchant will be willing to pay you for it today) for you to be allowed to keep the property, as opposed
to what you are actually owing on the property, with all the accumulated interest charges and penalties
included. For example, say that what you owe on the property, a car, is $15,000, and its replacement
value today is $10,000. You can ask to pay back only the $10,000 figure. However, you'll need to be
able to come up with the money for you'll have to pay the agreed redemption amount right away in a
lump sum.
NOTE: Because of this critical element of requiring that to redeem property under Chapter 7 bankruptcy,
the debtor is to make a lump sum payment, in a situation where the debtor cannot afford the money to
do so, the debtor may be able to save the property under Chapter 13. Under Chapter 13, you'll be
allowed to pay off the property's replacement value spread out over the 3 or 5 year life of the
repayment plan, rather than just making one big, lump sum payment.
6. If you Wish to "Reaffirm" a Current Debt
Do you wish to REAFFIRM a current debt - that is, to pay off a secured debt, any way, regardless of the
bankruptcy proceedings? If you do, Chapter 7 bankruptcy may just be the right choice for you. This is
yet another way you can hang on to a secured property that you desperately need or wish to keep,
rather than wait and have the creditor take it and sell it to someone else.
When you "reaffirm" a debt, you and your creditor sign a brand new contract, a "reaffirmation
agreement" - setting forth the amount you owe on the old debt and the terms of repayment, which you
might even be able to negotiate better terms on. The basic deal is, you keep the property, but you've
got to keep current on your payments according to the terms of the reaffirmation agreement. In
practice, the reaffirmation remedy is usually more advisable to be used when the other option, the redemption
option, is either not available or is impracticable -just about when this is practically the only way feasible
that’s available for you to be able to keep the property that you believe you can't possibly do without (e.
g., a car that you must have in order to keep your job, and the like), and only when you're pretty certain
that you'll be able to pay off the new indebtedness. This is so because of one fundamental reason:
reaffirmation leaves the debtor stuck with both the personal liability for the debt, and the creditor's lien
on the property; you're just about pretty much stuck with that debt obligation, whatever you do, since
you can't possibly rid yourself of that debt even after your get discharge in bankruptcy.
(See ... for procedures for reaffirming a secured debt).
7. If you Are a Homeowner Who Can Stay Current in Your Mortgage Payments
Are you a homeowner who is current today in your mortgage payments, and is financially able to stay
current, and your equity in the home (what you can reasonably sell the home for today, minus the
outstanding mortgage you owe on it) is fully within the homestead exemption limit to which you are
entitled under your state law? If so, then if you were to file for Chapter 7 bankruptcy, you can pretty
much rest assured that you'll not lose your home. (On the other hand, if you are behind with several
payments in your mortgage obligations, or your equity in the home is significantly more than the amount
of the homestead exemption to which you are entitled, then Chapter 13 bankruptcy will likely be your
best option for saving your home)
WILL THE CHAPTER 13 BANKRUPTCY BE THE
RIGHT CHOICE FOR YOU?
A. Chapter 13
Basically, in Chapter 13 type of bankruptcy, you commit, through a Repayment Plan you are to propose,
to repaying all or a portion of your debts over a period of time under the supervision of the bankruptcy
court, but you get to keep any of your property regardless of its value.
(Contrast that with Chapter 7, which permits you to "discharge" or wipe out most of your debts, but in
return, you are to give up any property you own, except for those which fall under the "exempt"
property category which cannot be seized under the bankruptcy law).
B. When Chapter 13 May Be Right for You
In general, all relevant things considered, the following will constitute an ideal circumstance when it will
make the most economic sense for you to file for Chapter 13 bankruptcy:
1. If you Are an Individual Debtor.
Are you an individual, or filing for bankruptcy as an individual, with personal debts - and not as a
business entity or otherwise? If so, then that would be one important consideration existing for which
filing for Chapter 13 may be right for you. Under the bankruptcy law, only individuals, and not business
entities (corporations, partnerships, etc), are permitted to file for Chapter 13. (If you are an entity such
as a corporation, a Limited Liability Company or a partnership, the proper avenue for you is to file under
the Chapter 11 bankruptcy Code. And, on occasion, particularly when an individual finds himself in high
debt amounts that exceed the debt limits allowed for filers under the Chapter 13 bankruptcy, the
individual may file under Chapter 11 bankruptcy, as well).*
2. If You're a Debtor Who Doesn't Have a Choice But to File For Chapter 13.
Does your determination from the initial calculations you make show that your "current monthly income"
is MORE than the "median income" for the family size you fall under for your state? (See the Monthly
Income & Means Test calculations: CLICK HERE)
And, did you take the "means test" and fail to pass it? If so, you're probably not eligible to file under
Chapter 7, and so you're probably not eligible to file under anything other than Chapter 13.*
Hence, you have practically no other real choice; you've just got to file for Chapter 13.
CLICK HERE for the information on making the above-listed "current income" and "means test"
calculations for determining your Chapter 13 bankruptcy eligibility status.
NOTE: If the result of your initial calculations is that your average monthly income during the 6 months
before filing for bankruptcy is higher than your state's median income, you probably MAY not be able to
qualify for Chapter 7 - at the end of the day, after you shall have made the further calculations (the
"means test") necessary. However, if your initial calculations is that your average monthly income during
the 6 months before filing for bankruptcy is higher than your state's median income, and the result of
your further calculations (the "means test) shows that your disposable income is of the amount that
would allow you to pay your unsecured creditors at least $166 a month over a 5 year repayment period,
then you almost certainly would qualify only under Chapter 13.
3. Your Debts Must Fit Within Certain Limits
Under the bankruptcy law, to be eligible to file for Chapter 13 bankruptcy, your debt structure must fit
strictly within the designated legal limits. Your total debts must not be in excess of:
Do your debts fall within the debt limits described above for your secured, as well as your unsecured,
debts? If so, then that would be one important consideration existing for which filing for Chapter 13 may
be right for you. (See HERE for more on classification of secured and unsecured debts).
4. Do You Owe Certain Kinds of Debts That Are Only Dischargeable in Chapter 13?
Under the new bankruptcy law, there is one category of debts created by the new law which can only
be discharged in Chapter 13, but NOT in Chapter 7. They are:
Determine if you have these kinds of debts listed above. This could be one important consideration
existing for which filing for Chapter 13 may be right for you. (See Chapter 12 for full discussion of these
kinds of debts)
5. You Must Be Employed or Have Steady Income Source
A critical component of Chapter 13 bankruptcy, is that you (the debtor) must show that you are currently
employed and/or have a steady and reliable regular source of income. This is for a rather obvious
reason: you've got to have a steady income in order to be able to fund the payment plan you'll submit
for the repayment of your debts over a 3 or 5 year period of time (the usual length of the plan).
6. You Own a Home or Car with a Lot of Built-Up Equity that you'd Like to Save
Let's say, for example, that you own your own home (or other major investment, such as a car or an
antique) that you've got a lot of built-up equity in, and that you face a foreclosure of the home (or
repossession of the property) because you've been far behind in your payments, but this is an item you
very much need and want to keep. Under Chapter 7 bankruptcy, you'll likely lose your home or the
valuable antique or car. This is simply because of one fundamental fact in bankruptcy: when it conies to
the issue of catching up on unpaid back mortgage payments -called the "curing of an arrearage" -
Chapter 7 bankruptcy simply does not offer a procedure accomplishing that. Doing a Chapter 13, on the
other hand, may be a far better alternative for you in that.
With Chapter 13, the home foreclosure (or other) action on your home can be permanently stopped;
Chapter 13 will allow you the precious time that's needed for you to catch up on the missed payments
over the 3 or 5 year repayment period, and keep the property. (There is one notable exception,
however, when a Chapter 13 bankruptcy filing will not stop a foreclosure, and that is in a situation
where you had filed another bankruptcy case within the previous 2 years and the court had, in that
proceeding, lifted the automatic stay which applied and allowed the mortgage lender to proceed with
the foreclosure).
7. You Own or Owned a Home that is worth Less than you Owe on it, or
You Have an Unmanageable Unsecured Debts.
EXAMPLE: The outstanding mortgage debt owed by Mr. A, a Maine resident, on a house he owned in
another state, was $500,000. His mortgage lender had foreclosed on the house; the house had an
appraised value of $400,000 at its foreclosure. Meaning, in other words, that the house's appraised
value was $100,000 less than Mr. A owed on the house, and so Mr. A still owed a $100,000
"delinquency" debt to his lender on the house. Worried that the lender might come after him for the
$100,000 delinquency, Mr. A even considered whether it would be better for him to file Chapter 7
bankruptcy. He took the "means test" and passed it for Chapter 7.
In this case, it might be a wiser and more economically beneficial deal for Mr. A to go for Chapter 13,
rather than Chapter 7. Why? Because, such delinquency debt is deemed an unsecured debt in
bankruptcy, and if he files for Chapter 13, he could propose to pay as little as $2,000 (total) over a 5-
year repayment plan period on the $100,000 delinquency, plus avoid tax liability on it.
8. You Have a Significant Amount of Property that Is Nonexempt or of Sentimental Value
Do you, perhaps, have a significant amount of property that falls under the category of nonexempt
property, or property that has a great deal of sentimental or special value to you, and which really
matters a great deal to you as a major cause for your seeking to file for bankruptcy? Then, Chapter 13
is probably the better option for you, for the reason that, in contrast to Chapter 7 which will require that
you give up any nonexempt property you own to be sold for the benefit of your creditors, Chapter 13
does not require that you give up any property, regardless of its exempt status or its value — providing,
though, that you've got to be able to afford the "disposable income" for you to fund the Chapter 13
repayment plan for your debts over the next 3 to 5 years.
(For more on the figuring out of how much "disposable income" you'll need to be able to fund a Chapter
13 plan, CLICK HERE).
9. You Have a Vehicle that's Worth Far Less than You owe On it
Proposition: Let's say your present vehicle is a good and reliable car that is in excellent condition which
you'd like to keep, but here's the problem - it's worth far less than you still owe on it in terms of what is
its present actual replacement value in the market. There's one special way that Chapter 13 bankruptcy
could be of great profit for you regarding this. You can possibly avail yourself of what is known as the so-
called "cram down" option that's only available in Chapter 13. The cram down remedy will allow you to
keep the car (the car has to have been purchased more than 30 months before the bankruptcy filing) by
reducing the debt you still owe on the car (let's say it's $19,000) to its current replacement value (say,
it's $15,000) and paying off that replacement amount in equal installments over the life of the Chapter
13 plan, rather than having to pay the full amount you owe on the contract ($19,000 in this example).
10. You Have a Certain Kind of Co-debtor
Do you, perhaps, have a co-debtor involved in your debt who will be protected from liability in your
bankruptcy case under your Chapter 13 plan, but who will not be protected if you file under Chapter 7?
Recall that under the bankruptcy rules, in a Chapter 7 case, even if the debtor who files for the Chapter
7 bankruptcy in a cosigned debt is discharged of the debt, the co-debtor would still be on the hook for it
and still remain liable to repay the debt. Not so, though, with Chapter 13 bankruptcy. With Chapter 13
case, the co-debtor, like the debtor, would also not be liable for the debt for the duration of the
repayment plan - as long as the repayment plan provides for the payment of some or all of that debt.
However, if there is an amount of the debt that you still haven't paid at the end of the plan period, then
the co-debtor will still remain responsible for that part.
11. You Have Certain Kinds of Debts Which Can Only Be Paid Off in Chapter 13
There is one small class of debts or obligations which, under the bankruptcy rules, are classified as "non-
dischargeable* debts, but which can be paid off over time by the debtor only in Chapter 13. In other
words, though these debts still remain non-dischargeable and would not be discharged in bankruptcy
under any circumstances, the debtor would be allowed to pay them off in Chapter 13 bankruptcy. They
include debts like a tax obligation, student loan, or many other non-dischargeable debts in bankruptcy.
Do you, perhaps, have such debts? Then, you may consider looking into filing for Chapter 13 with that
consideration in mind.
(See "Debts that are Dischargeable in Bankruptcy, and Debts that Are Not," for more on this).
IMPORTANT: Note that under the bankruptcy law and procedures, there are certain times and
situations when certain debts which are non-dischargeable debts, will be dischargeable and be
discharged in bankruptcy. See, "When Certain Debts Which Are Non-dischargeable Could Be
Discharged," at ).
The Chapter 13 bankruptcy does have certain important disadvantages. They include the following:
i) In a Chapter 13 bankruptcy, the debtor would have to repay most, or at least some, of his debts. In a
Chapter 7 (straight) bankruptcy, on the other hand, he repays practically nothing. Yet, the law does not
make any differentiation between a person who files under Chapter 13 and another who files under
Chapter 7 in terms of how they are treated or viewed on the record in credit matters. For example,
Section 312(b) of the 1978 Bankruptcy Code provides that credit reporting agencies may carry all
bankruptcies, both Chapter 7 and Chapter 13, on the books, including Chapter 13 cases, for 10 years
after the petition is filed.
ii) Under certain circumstances, a debtor who gets a discharge of his debts through Chapter 13
bankruptcy, may not be allowed to file for straight bankruptcy for the next 8 years. He may not be
allowed to do so unless the payments he made under the Chapter 13 case amounted to at least 70% of
all the allowed unsecured claims, and unless the Chapter 13 plan was "proposed by the debtor in good
faith" and was "the debtor's best effort."
iii) The Chapter 13 proceedings are more cumbersome and more time consuming, requiring more
paperwork than Chapter 7; they are more expensive (lawyers would charge an average of $4,500 or
more for Chapter 13, as compared to $2,500 for Chapter 7); and, on top of that, there's one other extra
expense that will be involved in filing for Chapter 13 – it will cost a debtor an additional average amount
of at least 10 percent of all payments made under the plan, calculated as "administrative" expenses for
the chapter 13 case, and added to the total amount the debtor will repay.
iv) As of 1990, all student loans, which formerly used to be dischargeable in Chapter 13 cases, will now
be non-dischargeable under Chapter 13 for cases filed after November 5,1990 [U.S.C. 1328(a) as
amended in Public Law 101-508, Section 3007(b)].
F. Which of the Two Types of Personal Bankruptcy do you Choose?
Quite frankly, the stark reality of the matter, particularly under the current conditions brought about by
the new Bankruptcy Act of 2005, is that there is really no more real "choice" for debtors as to whether
to file for Chapter 7 or Chapter 13 bankruptcy. The choice of which of the two types of bankruptcy to file
under today, really boils down to one fundamental factor - and one fundamental factor alone: the hard,
cold, nitty gritty issue of dollars-and-cents, in terms of which one of the two types can you afford to
"choose"? Certainly, if your financial circumstances are absolutely terrible, and you are, say, unemployed
or merely earning some little unemployment insurance payments, or you lack any income at all, or your
debt burden is so high that it completely outstrips your income or your capacity to make any payments,
then making any sort of "plan" to repay anybody anything whatsoever may be difficult, perhaps
practically impossible and out of the question altogether for you.
Yes, you've probably gotten the point already: hard, cold cash, the practical means and ability to pay, is
what the "choice" is all about, baby; not morality or good intentions or personal preference!! Or, even
what it is that makes economic sense!!
Look at it this way. In the past, under the old bankruptcy law and practice which pre-dated the 2005
law, the majority of debtors who contemplated or filed for bankruptcy, went overwhelmingly for the
Chapter 7 type. With Chapter 7, they didn't have to make any payments on their debts, of course. But
the reason they could do that (i.e., take the Chapter 7 option), was fundamentally because the debtors
really had a choice under the then existing law - the rule under the old law, was that only the debtor
(and the debtor alone) had the sole right to choose to file under Chapter 13 bankruptcy and make some
debt repayments, if that was what he voluntarily wanted to do, and if he didn't want to file for Chapter
13, he couldn't be compelled to do so by the court or anybody. The new (current) bankruptcy law,
however, has effectively stripped debtors of that choice as debtors must now meet certain financial
"eligibility requirements" and pass an income-standard "means test" before they may be allowed, based
on a showing of a lesser income, to file under Chapter 7 bankruptcy. Otherwise, they'll have no "choice"
- they must file under Chapter 13 and make some repayments of their debt!
The point is that under the current bankruptcy system, you DON’T really have to concern yourself with
the question, 'which one of the two types of bankruptcy should I choose to file under.' That "choice" has
already been largely made for you by the law: your disposable income status result from your "means
test," would largely determine that issue for you as to which of the two categories you should, or must,
file under.
G. WHAT IF YOU DON'T QUALIFY FOR, OR CAN'T, FILE UNDER
CHAPTER 7OR 13. IS THERE ANY OTHER TYPE OF BANKRUPTCY YOU CAN
FILE FOR?
The answer to the question is: 'Yes, there is.' As fully explained in the preceding sections of this chapter,
the central concern of the manual is with the two basic types of "personal," or "consumer" bankruptcy
that are employed by debtors - the Chapter 7 or straight liquidation type of bankruptcy and the Chapter
13 or debt repayment type. But what if, for one viable reason or the other, you find that you can't or
won't be able to file under Chapter 7, and do not qualify to file under Chapter 13, what then? Is there
any other option for you under the bankruptcy laws?
FORTUNATELY, THE ANSWER IS, YES, THERE IS. There's still an option to file for one other type of
bankruptcy — Chapter 11 bankruptcy.
As can be seen from a review in this chapter of both the primary eligibility requirements for, and the
advantages and disadvantages of, filing under Chapter 7 and Chapter 13 above (see Sections A
through E of Chapter 3, and ), there are any number of reasons and conditions under which a debtor
may, on occasion, find it impracticable or financially ill-advised, or both, to file either under Chapter 7 or
13, and for which reason he or she may need to have a different bankruptcy option altogether. You can,
possibly, be kicked out of Chapter 7 because your income is too high, and then be unable to propose a
Chapter 13 repayment plan that the judge will find “confirmable” or acceptable.
Say, for example, you own a very expensive home or some other beloved property but one of highly
expensive quality, (e.g., an antique, a one-of-a-kind automobile or artwork) which you'd rather preserve
by filing for bankruptcy. In such a situation, you would probably (or typically) not be able to do so either
under Chapter 7 or 13. Chapter 7 will be outrightly out of the question for you in the first place, since
you own too much to qualify within it, while you may not be eligible to file under Chapter 13 because
you'll probably have unsecured amount of debt totaling in excess of the $336,900 limit or secured debt
amount in excess of the $1,010,650 limit permitted under the bankruptcy requirements. Or, say you're
not eligible (not allowed) to file under Chapter 7 because your current monthly income was considered
too high when you filed, but however, you happen not to have a steady income by the time you convert
to Chapter 13, and so that will mean that your proposed repayment plan won't be approved by the
judge, and so you can't file under Chapter 13, either!
Now, if you find yourself in such a predicament where you can neither file under Chapter 7 nor Chapter
13, there'll be just one other potential option you may want to consider and explore under the
bankruptcy laws. And that option would be to consider filing under Chapter 11 of the bankruptcy code.
To sum it all up in one word, the critical difference which Chapter 11 exclusively brings to debtors is that
it provides a debtor of above average upper income status, or one who has comparatively larger debts
and income or assets, such as substantial personal investments in real estate, securities or other
valuables, an avenue in bankruptcy to seek rehabilitation and reorganization of his or her financial
affairs — something neither Chapter 7 nor 13 can provide for one in such a situation.
As one experienced bankruptcy legal practitioner, Weldon Ponder, of Austin, Texas, once put it
"the limits of $250,000 in unsecured debts and $750,000 in secured debts for a Chapter 13
debtor, used to be reasonable [back in 1978 when the bankruptcy law was enacted]. [It's
now $336,900 in unsecured debts and $1,010,650 in secured debts since the October 2005
new law]. But nowadays (in the 1990's and beyond), a professional with some real estate
can easily go over them."
In sum, if you are a debtor with substantial, above average investments or assets in real estate or
stocks, for example, or middle or upper-income individual with enough assets to negotiate a repayment
plan with the creditors, but do not qualify or find it economically advantageous to file either under the
Chapter 7 or Chapter 13 type of bankruptcy, you may very well consider filing under a third option: the
CHAPTER 11 type of bankruptcy. And, under the current law, you will be quite eligible to file Chapter 11
as an individual, whether you are in business or otherwise, or a sole proprietor, a particular or private
entity—just so long as you are not a governmental unit or agency, a stockbroker or commodity broker,
or insurance company, or a banking institution.
Filing for Chapter 11 bankruptcy affordably, is really quite practicable. At least, it's not that much more
of a problem than you'll find in filing, say, Chapter 13 bankruptcy. You can find all the details you need
about filing for Chapter 11 in the handbook marketed and promoted in this website titled, HO W TO FILE
FOR CHAPTER 11 BANKRUPTCY FOR BUSINESS DEBTS, WITHOUT A LAWYER.
THE ELIGIBILITY REQUIREMENTS YOU NEED TO MEET FOR FILING FOR
BANKRUPTCY UNDER EITHER CHAPTER 7 or CHAPTER 13
As stated in Section…above, there are TWO main types of bankruptcy open to personal debt filers in
bankruptcy Chapter 7, and Chapter 13 bankruptcies.
The prime impetus and underlying purpose which guide the new bankruptcy law of 2005 and the
eligibility rules that control bankruptcy filing, is largely to find ways by which to get debtors to pay back
at least a part of their debts - if they are, in any way even minimally able to afford it. A purpose which
translates, in other words, to getting debtors, or, in fact, requiring them, to file for bankruptcy under
Chapter 13, rather than Chapter 7.
Below are a summary of the major eligibility rules and requirements which debtors seeking bankruptcy
must now meet under the new 2005 law in order to successfully file for bankruptcy or be able to obtain
a court’s order for bankruptcy discharge.
A. Eligibility Requirements for Chapter 7 Bankruptcy
1. Credit Counseling. Before you even file for bankruptcy (whether it be for Chapter 7 or for Chapter
13), one of the very first things you must do (aside, perhaps, from reading the material in this website
and other sources to get informed on the basics of bankruptcy!), is to have a formal consultation on
credit counseling with counselors at an approved non-profit credit counseling agency. You are required
to have done this WITHIN the 180-day period immediately preceding filing your petition for bankruptcy.
The purpose of this, is for them to explore with you, and to advice you of, any other practicable
alternatives that might be available for resolving your debt problem other than bankruptcy, including
working out a budget analysis of your finances, among other things. The list of the approved credit
counseling agencies are readily available for any debtor to obtain from:
1) the Bankruptcy Court that covers a debtor’s district or area; or 2) at the website of the U.S. Trustee
at this web site: www.usdoi.gov/ust. Click "credit counseling and debtor education" to see the list. Upon
the debtor’s completion of the program with them, the debtor is to obtain a Certificate of Completion
from the agency showing that he/she undertook such counseling, and submit same to the court later on
if he/she files for bankruptcy.
.
NOTE: One exception when you might be allowed to file for bankruptcy without having gone through
the credit counseling requirement, would be where you can certify to the court's satisfaction that you
need to file for bankruptcy on an emergency basis (say, for example, to stop an eviction, a mortgage
foreclosure, or a wage garnishment), or where you can certify that you tried but were unable to obtain
counseling within 5 days of your requesting one.
2. Figure out Whether You Will Be Financially Able To File For Bankruptcy,
in the First Place.
First, calculate your income status. If your determination (from this calculation you are to make) shows
that your "current monthly income" is MORE than the "median income" for the family size you fall under
for your state, here are the options you have:
- You are NOT eligible to file for Chapter 7 bankruptcy outright. However, if you would like
Chapter 7, then you must first take what is known as the "means test" and pass it, to show
proof that you don't have enough "disposable income" to be able to fund a Chapter 13
repayment plan and repay some or all of your debts. If you fail to pass this test, then what
that means is that you're considered to have enough disposable income to be able to make
some repayments under a Chapter 13 Repayment Plan, and so doing a Chapter 7 is
practically out of the question for you.
If, on the other hand, your determination (from the initial calculation of your income status you are to
make) shows that your "current monthly income" is LESS than the "median income" for the family size
you fall under for your state, then here are the options you have:
- You may (you are eligible to) file for Chapter 7 bankruptcy. If you want to file for Chapter 7, and
choose to so file under Chapter 7, you will be allowed to do so and will ordinarily not be forced
into filing Chapter 13. (You will be allowed to go ahead with filing for Chapter 7 unless the court
were to find, after it shall have received a complaint from the U.S. Trustee, that you are not, in
fact, qualified to file for Chapter 7 because of the uncovering of some fraud or misrepresentation
on your part - a scenario which does not happen too frequently). (A principal way this could, and
may, happen, is for the court to find (following a motion filed by the court or the U.S. Trustee, and
it deliberations on the facts presented) that allowing you to proceed with filing for Chapter 7
under such circumstances, would be an "abuse" of the bankruptcy system. Typically, this will
happen if, later on when you file your Chapter 7 bankruptcy petition, it turns out that your actual
income that you had used in working out your Means Test results, is actually significantly higher
than your actual expenses).
- If, however, you choose to file for Chapter 13 bankruptcy under this circumstance (i.e., when you
know that you don't have to, since you are readily eligible to file for Chapter 7), you will
determining how much "disposable income" you'll have left over to fund a repayment plan;
rather, you'd be allowed to use your ACTUAL expenses (which is generally higher relative
to the IRS-compiled figures) in calculating your disposable income. And, secondly, you'll also
be given the privilege of proposing a repayment plan that will last for only a 3 year period
(rather than the usual 5-year period).
For the information on the making of the above-listed "current income" and "means test" calculations for
determining your bankruptcy eligibility status, CLICK HERE.
3. You Must Be a Human Person or a Small Business.
To be eligible to file for Chapter 7 (or 13) bankruptcy as a "consumer" debtor, you must be a human
person (as opposed, for example, to a corporation) and a debtor the majority (more than 50%) of
whose debts are primarily consumer type debts - i.e., debts which are incurred primarily for yourself and
your family, rather than for a business. (On the other hand, non-consumer debts are debts, for example,
which come from the operation of a business, back taxes, or debts for personal injury or property
damage caused by the debtor). You must be an individual (or a husband and wife, if filing jointly), or a
sole proprietor
(If you are a sole proprietor of a business (or a sole proprietor filing jointly with a spouse who owns a
business), you can include all business debts on which you have personal liability, meaning that even for
your business debts, you can include them in bankruptcy since legally a sole proprietor is deemed one
and the same thing as his business entity, and so is personally liable for the debts of his business.
Similarly, the business debts of a business partnership for which you are a member, can also be
included in your bankruptcy as "consumer" debts — to the extent, however, that you (and your spouse,
if filing jointly) are personally liable. If you are a corporation, or a limited liability company, or a
partnership, you are to file, in stead, a "business" Chapter 7 bankruptcy).
4. You Must Not Have Had a Previous Bankruptcy Discharge within Certain Time
You are NOT eligible to file for Chapter 7 bankruptcy, if: you previously received a discharge of your
debts in a Chapter 7 bankruptcy within the previous 8 years, or a discharge in a Chapter 13 bankruptcy
within the previous 6 years.
5. You Must Not Have Been Barred By a Previous Bankruptcy Dismissal
You are ineligible to file for Chapter 7 bankruptcy, if: you had a previous bankruptcy case that was
dismissed within the past 180 days prior to your filing, based on any of the following reasons:
- You violated a court order
- The court ruled that you filed a fraudulent bankruptcy case or one that is an abuse of the
- You sought the dismissal of the case after a creditor asked the court to lift the automatic
6. You Must Not Have Engaged in Certain Acts of Financial
Dishonesty with Your Creditors
Your Chapter 7 bankruptcy case may be challenged or dismissed, if your creditors, or the Trustee, makes
the case to the court which the court finds to be valid, that you've engaged in acts of dishonesty and
fraud, or in an act of dishonest intent on your part, towards your creditors -e.g., evidence that you've
tried to conceal property or money so you could keep them from going to your creditors; that you've
uploaded cash or assets to your friends or relatives to hide them from your creditors or from your
spouse in a divorce proceeding, or that you've run up large bills for high ticket items just before you had
to file for bankruptcy when you are clearly broke and knew (or should have known) that you could not
possibly repay the debts.
7. You Must Be Able and Ready to Provide Certain Required Documents
To file a Chapter 7 case, you must have at hand the following documents, among others, ready to
present them to the court at filing (or at least within 45 days after filing), or the case may be dismissed:
- Certificate of Credit Counseling (from the credit counseling course you shall have had from the
start with an approved counseling agency) - Evidence of payments from employers (pay stubs) received within the 60 days prior to filing for
- Tax returns for the most recent tax year
- Tax returns you shall have filed during the time the bankruptcy case is pending
- Disclosure of any interests in education IRAs or state tuition programs, if any
- A photo ED
B. Eligibility Requirements for Chapter 13 Bankruptcy
1. Credit Counseling. Before you even file for bankruptcy (whether it be for Chapter 7 or for
Chapter 13), one of the very first things you must do (aside, perhaps, from reading the material in this
website and other sources to get informed on the basics of bankruptcy!), is to have a formal
consultation on credit counseling with counselors at an approved non-profit credit counseling agency.
You are required to have done this WITHIN the 180-day period immediately preceding the filing of your
petition for bankruptcy. The main purpose of this, is for them to explore with you, and to advice you of,
any other practicable alternatives that might be available for resolving your debt problem other than
bankruptcy, including working out a budget analysis of your finances, among other things. The list of the
approved credit counseling agencies are readily available with the Bankruptcy Court of each district or
area, or at the website of the U.S. Trustee at: www.usdoj.gov/ust. Click "credit counseling and debtor
education" to see the list. Upon your completion of your program with the agency, you are to obtain a
Certificate of Completion from them showing that you undertook such counseling, and submit same to
the court later on if you file for bankruptcy.
NOTE: One exception where you might be allowed to file for bankruptcy without having gone through
this credit counseling requirement, would be where you can certify to the court that you need to file for
bankruptcy on an emergency basis (say, for example, to stop an eviction, a mortgage foreclosure, or a
wage garnishment), or where you can certify that you tried but were unable to obtain counseling within
5 days of your requesting one.
2. Figure out Whether You Will Be Financially Able To
File For Bankruptcy, in the First Place.
First, calculate your income status. If your determination (from this calculation you are to make) shows
that your "current monthly income" is MORE than the "median income" for the family size you fall under
for your state, here are the options you have:
- You are NOT eligible to file for Chapter 7 bankruptcy outright. However, if you would still like to do
so, then you must first take what is known as the "means test" and pass it, to show proof that
you don't have enough "disposable income" to be able to fund a Chapter 13 repayment plan and
repay some or all of your debts. If you fail to pass this test, then what that means is that you're
considered to have enough disposable income to be able to make some repayments under a
Chapter 13 Repayment Plan, and so doing a Chapter 7 is practically out of the question for you.
If, on the other hand, your determination (from this initial calculation of your income status that you are
to make) is that your "current monthly income" is LESS than the "median income" for the family size you
fall under for your state, here are the options you have:
- You may (you are eligible to) file for Chapter 7 bankruptcy. If you want to file for Chapter 7
forced into filing Chapter 13. (You will be allowed to go ahead with filing for Chapter 7,
unless the court were to find, after it shall have received a complaint from the U.S. Trustee,
that you are not, in fact, qualified to file for Chapter 7, because of uncovering of some fraud
of misrepresentation on your part — a scenario which does not happen too frequently) [ A principal
way this could, and may, happen, is for the court to find (following a motion filed by the court or the
U.S. Trustee and it deliberations on the facts presented) that allowing you to proceed with filing for
Chapter 13 would be an "abuse" of the bankruptcy system. Typically, this will happen if, later on when
you file your Chapter 13 bankruptcy petition, it turns out that your actual income that you had used in
working out your Means Test results, is actually significantly higher than your actual expenses].
- If, however, you choose to file for Chapter 13 bankruptcy under this circumstance (i.e., when
be given the privilege of not having to use the IRS-compiled expense standards in
determining how much "disposable income" you'll have left over to fund a repayment plan; rather,
you'd be allowed to use your ACTUAL expenses (which is generally higher relative
to the IRS-compiled figures) in calculating your disposable income. And, secondly, you'll
also be given the privilege of proposing a repayment plan that will last for only a 3 year
period (rather than the usual 5-year period).
For the information on making the above-listed "current income" and "means test" calculations for
determining your bankruptcy eligibility status outlined above, CLICK HERE.
3. You Must Be a Human Person or a Small Business.
A business cannot file for Chapter 13 bankruptcy, and so to file for a Chapter 13 bankruptcy case, you
must be a human person (or a husband and wife, if filing jointly). You must include all your personal
debts. If you are a sole proprietor who owns a business, or a partner in a business with others, you can
include all debts of the business in which you have personal liability, meaning that even for your
business debts, you can include them in bankruptcy since legally a sole proprietor is deemed one and
the same thing as his business entity, and so is personally liable for the debts of his business. Similarly,
the business debts of a business partnership for which you are a member, can also be included in your
bankruptcy as "consumer" debts - to the extent, however, that you (and your spouse, if filing jointly)
are personally liable. Except, however, that in a Chapter 13 situation, you have to file the case in your
own personal name, and not in the business name used for the business, for the reason that technically
a business cannot file for Chapter 13 bankruptcy. There is one notable situation, though, when the
general rule that in Chapter 13 you may include all business debts as though they are personal debts,
does not hold - namely, when it comes to stockbrokers and commodity brokers. With respect to such
business entities, they may not file for Chapter 13 bankruptcy, even for personal debts. Finally, if you
are a corporation, or a limited liability company, or a partnership, you are to file, in stead, a "business"
Chapter 7 bankruptcy, or Chapter 11.
4. Your Debts Must Fit Within Certain Limits
To be eligible to file for Chapter 13 bankruptcy, your debt structure must fit strictly within the designated
legal limits. Your debts must NOT be in excess of (note that these figures change over time with the rise
in price index):
- $ 1,010,65 0 for secured debts or
- $336,900 for unsecured debts
5. You Must Not Have Had a Previous Bankruptcy within Certain Time Limits
You cannot be discharged in a Chapter 13 bankruptcy case, if:
- You had received a discharge in a previous Chapter 13 case in the last 2 years, or
- You received a discharge in a Chapter 7 case filed within the last 4 years.
In other words, if you wish, you may go ahead and file for Chapter 13 in such a situation, but even if
you do, you still won't be granted a discharge from those debts until the stipulated time has passed.
6. You Must Be Current on Your Income Tax Filings
To be eligible to file for Chapter 13 bankruptcy (or, at least, to have the case processed by the court),
you have to be ready and able to provide evidence to the court that you filed your federal and state
income tax returns for the previous 4 years before your bankruptcy filing - e.g., by providing the tax
returns, or the transcripts of the returns obtained from the IRS. You must provide such proof no later
than the date set for your First Meeting of Creditors (usually following some one month or so after the
case is filed), and unless ultimately provided, the trustee may seek, and the court will usually grant, a
dismissal of the case.
7. You Must Be Able to Propose a Repayment Plan That Meets the Legal Requirements
To have a viable, successful Chapter 13 bankruptcy, you must have the financial ability and disposable
income sufficient to fund a proposed repayment plan that the court will find approvable ("confirmable").
WILL THE CHAPTER 7 BANKRUPTCY BE THE RIGHT
CHOICE FOR YOU?
A. Chapter 7
The Chapter 7 type of bankruptcy is sometimes called "straight" or "pure" bankruptcy in that it basically
permits you to "discharge" (wipe out or cancel) most of your debts so that you don't have to pay them,
except that you'll be required to give up property you own (if any) which are not "exempt" property
under the bankruptcy law. Chapter 7 acquired this name or reputation as the "straight" or "pure"
bankruptcy out of the general sense of the original, historical purpose of the American bankruptcy
system: namely, the unhindered ability of the average overburdened debtor to file for bankruptcy, and
to obtain almost total relief from their debts by the bankruptcy act from their debts and creditors in
order to get a "fresh start" in life. Summed up simply, the basic culmination of a Chapter 7 bankruptcy, is
that it results in the elimination of most of your debts so that you are no more liable for paying them,
and your legal protection from further efforts by creditors to harass you debtor or to collect on those
debts. And, by this, you are able to have a "fresh start" in your economic life without having to contend
any more with the burden of your past debts.
B. Some Reasons why Most Bankruptcy Filers File Under Chapter 7
In point of fact, historically, most debtors with a choice who file for bankruptcy, have traditionally opted
for Chapter 7 bankruptcy. In deed, compared to Chapter 13, Chapter 7 bankruptcy has been a widely
"popular" brand of bankruptcy, with at least 7 out of 10 debtors who file for bankruptcy opting for
Chapter 7. There are a few reasons for this:
- 'In stark contrast to Chapter 13, Chapter 7 is by far relatively fast and easier to file, and,
require payments over time, and the filer comes out largely debt free (except for those secured debts
that are not dischargeable any way in bankruptcy, if you have any of them, such as student loans, child
support or recent back taxes). Technically, the whole process, from the filing of the Chapter 7 case to its
close, would take just 4 to 6 months to finish, compared to 3 to 5 years or so for a Chapter 13 case.
- To file for Chapter 7, you’ll need to provide your tax returns for up to the previous 4 years, but
you need not be current in the income tax filings. (In a Chapter 13 case, you are required to file
your most recent tax return as well as to show that you are current on your taxes for the last 4
years.)
- Administratively, the processing of the Chapter 7 bankruptcy usually requires only one brief
appointed by the bankruptcy court to handle the processing of the bankruptcy case on behalf
of the court, but who is not a judge. In contrast, a typical Chapter 13 case will require at least one,
often two or more, hassle-full, time-consuming court hearings with a judge before a repayment plan is
finally hammered out between the debtors, the trustee and the creditors, and becomes approved
("confirmed") by the judge, and then carried out by the debtor over the multi-year life of the plan under
the supervision of the trustee.
- In terms of the costs of filing for bankruptcy, with the greater level of paperwork and greater
amount of time and hassles necessitated by the new bankruptcy law procedures, the average
fees charged by lawyers for any type of bankruptcy (whether Chapter 7, Chapter 11 or 13), have
dramatically risen, any way, since the 2005 law. Today, as of this writing, the average fee by
lawyers for Chapter 7, according to experts and fee survey reports conducted among bankruptcy
lawyers, is $2,500. And, because Chapter 13 bankruptcy requires even greater amounts of time
and paperwork than Chapter 7, the lawyers' fees as of this writing for Chapter 13 is around
$3,500 to 4,500.
(Of course, as a person probably hugely indebted and short of cash but probably determined,
nevertheless, on seeking out the debt relief option provided by bankruptcy, if you've made the personal
decision to use the aid and assistance of a competent bankruptcy document preparer, or even of a good
self-help bankruptcy book - such as the one recommended and promoted by this Website - to do your
bankruptcy yourself, then the prospect of your having to shell out such horrendous sums as the ones
mentioned above, would be one problem you just wouldn't have to worry about, would it? And so, this
probably wouldn't be any worry of yours!)
C. When Chapter 7 May Be Right for You.
In general, all relevant things considered, the following will constitute an ideal circumstance when it will
make the most economic sense for you to file for Chapter 7 bankruptcy:
1. If you find that you're qualified NOT to have to take the Means Test, in the first place.
Basically, you meet this requirement, if: (1) At least 50% or more of your debts are classifiable as
"consumer" types of debt (consumer debts are defined as debts which are incurred primarily for yourself
and your family, rather than for a business); (2) your determination from the initial calculations you
make, shows that your "current monthly income" is LESS than the "median income" for the family size
you fall under (see the procedures for Monthly Income & Means Test calculations HERE); and (3) you are
certain in your own mind, that you are fully qualified to file for Chapter 7 because you know that NO
fraud or misrepresentation on your part can possibly be uncovered regarding the facts of your financial
condition that you filed or will file with the court in your bankruptcy petition papers.
CLICK HERE, for the information on making the above-listed "current income" and "means test"
calculations for determination of your bankruptcy eligibility status outlined above.
2. If the Bankruptcy Discharge you'll get will Actually Discharge Enough of Your Debts.
Under the bankruptcy law, there are certain types of debts - commonly referred to as "non-
dischargeable" debts - which cannot be discharged from bankruptcy, and will survive and still remain
your debt obligation even after you've had your bankruptcy discharge by the court, if you have those
kinds of debts. (See HERE for information on those kinds of debts).
Do you have those kinds of debts? And, more importantly, if you do, do such debts constitute a
major or large part of your debt burden? If you do not have those kinds of debts, or you do have them
but they do not constitute a significant part of your debt (or, getting rid of them is for you not really the
primary concern why you wish to file for bankruptcy), then filing for Chapter 7 bankruptcy may be right
for you.*
IMPORTANT: Note that under the bankruptcy law and procedures, there are certain times and situations
when certain debts which are, on paper, non-dischargeable debts, will be treated as dischargeable and
still be discharged in bankruptcy. See
3. If you Don't Have a Co-Signer Involved in Your Debt.
As a rule, in a Chapter 7 bankruptcy, if you have another person who joined with you as a "cosigner" in
a loan or other contractual obligation, and you are discharged in bankruptcy from that debt, you yourself
will become no longer liable for that debt, but your cosigner will still be on the hook for it and still remain
liable to repay the debt. Hence, if you do not have a debt involving a cosigner (or, certainly a cosigner of
the kind which you would want to get stuck with the debt, such as your treasured friend or beloved
spouse or relative), then that may be one important consideration existing for which filing for Chapter
7may be right for you.
4. If filing for Chapter 7 Won't Have You Lose Your Treasured Property
Under the bankruptcy system, the central idea for doing (Chapter 7 bankruptcy) is simply this: the court
will wipe out all or most of your major debts, but in return for that, you will give up to the Court (through
its main agent, the bankruptcy trustee), any property you own to be sold for the benefit of your
creditors, except for any such property among them that are "exempt" property designated by law as
not subject to such seizure by the trustee. The legal provisions which control and spell out what
property you can keep ("exempt" property), or lose (“nonexempt” property), in a bankruptcy case, are
called property "exemptions." Basically, property that is designated as EXEMPT property under the laws
of your state of filing, are property that can not be taken from you in bankruptcy (or you can pay the
trustee its equivalent value for it and keep it); and property that is designated as NONEXEMPT property
(if you have any), refer to property that can possibly be taken away from you and sold by the trustee to
pay your (secured) creditors.
The key to getting the best deal in respect to retaining your most treasured property in bankruptcy, is
rather simple. You'll need to use property exemptions to keep as much of your property as possible,
while discharging as much debt as you can. Turn to (CLICK HERE) for a list of the exemptions that may
be available to you. Does it appear to you that the bulk of your property is exempt - as is, in fact, the
case in real life situations with most debtors who file for bankruptcy? If that is the case with you, then
that would be one important consideration existing for which filing for Chapter 7 may be right for you.
(On the other hand, if it appears that you have a great deal of nonexempt property, or that filing for
Chapter 7 bankruptcy would not let you keep treasured property that you really want to keep, then you
may probably have to examine having to file for the Chapter 13 option. Chapter 13 let's you keep any
property you have, regardless of its exempt status or its value, as long as you will have sufficient
income to finance a repayment plan spread over the next 3 to 5 years for much of your "secured" debts,
and any "priority" debts you have, if any, in full.)
5. If you Wish to "Redeem" Property from The Trustee.
If you are current on your payments for a secured debt up to the time you file for bankruptcy (as
opposed to being in arrears on the payments), one way you can continue to hang on to the "secured"
property (i.e., the underlying property which secures the debt, such as the car, furniture, etc), if you
desperately wish to keep it, is by "redeeming" the property in a Chapter 7 bankruptcy - that is, by
buying it back from the creditor in a lump sum, rather than have the creditor take it and sell it to
someone else. A major advantage of the redemption of property approach, is that under the bankruptcy
law, you are allowed to redeem the property by paying the "replacement" value of the property - the
price you'll get for it today from a retail merchant, considering the age, wear and tear and current
condition of the property. (Note that the property involved, must be one used for (and the underlying
debt must be consumer debts on goods used for) personal, family or household purposes. That means
that you can't redeem property that secures business debts).
Redemption will be a great option for you if the debt you owe on the property exceeds the property's
current value, since this means that you'll be able to pay only the present worth of the property (what a
merchant will be willing to pay you for it today) for you to be allowed to keep the property, as opposed
to what you are actually owing on the property, with all the accumulated interest charges and penalties
included. For example, say that what you owe on the property, a car, is $15,000, and its replacement
value today is $10,000. You can ask to pay back only the $10,000 figure. However, you'll need to be
able to come up with the money for you'll have to pay the agreed redemption amount right away in a
lump sum.
NOTE: Because of this critical element of requiring that to redeem property under Chapter 7 bankruptcy,
the debtor is to make a lump sum payment, in a situation where the debtor cannot afford the money to
do so, the debtor may be able to save the property under Chapter 13. Under Chapter 13, you'll be
allowed to pay off the property's replacement value spread out over the 3 or 5 year life of the
repayment plan, rather than just making one big, lump sum payment.
6. If you Wish to "Reaffirm" a Current Debt
Do you wish to REAFFIRM a current debt - that is, to pay off a secured debt, any way, regardless of the
bankruptcy proceedings? If you do, Chapter 7 bankruptcy may just be the right choice for you. This is
yet another way you can hang on to a secured property that you desperately need or wish to keep,
rather than wait and have the creditor take it and sell it to someone else.
When you "reaffirm" a debt, you and your creditor sign a brand new contract, a "reaffirmation
agreement" - setting forth the amount you owe on the old debt and the terms of repayment, which you
might even be able to negotiate better terms on. The basic deal is, you keep the property, but you've
got to keep current on your payments according to the terms of the reaffirmation agreement. In
practice, the reaffirmation remedy is usually more advisable to be used when the other option, the redemption
option, is either not available or is impracticable -just about when this is practically the only way feasible
that’s available for you to be able to keep the property that you believe you can't possibly do without (e.
g., a car that you must have in order to keep your job, and the like), and only when you're pretty certain
that you'll be able to pay off the new indebtedness. This is so because of one fundamental reason:
reaffirmation leaves the debtor stuck with both the personal liability for the debt, and the creditor's lien
on the property; you're just about pretty much stuck with that debt obligation, whatever you do, since
you can't possibly rid yourself of that debt even after your get discharge in bankruptcy.
(See ... for procedures for reaffirming a secured debt).
7. If you Are a Homeowner Who Can Stay Current in Your Mortgage Payments
Are you a homeowner who is current today in your mortgage payments, and is financially able to stay
current, and your equity in the home (what you can reasonably sell the home for today, minus the
outstanding mortgage you owe on it) is fully within the homestead exemption limit to which you are
entitled under your state law? If so, then if you were to file for Chapter 7 bankruptcy, you can pretty
much rest assured that you'll not lose your home. (On the other hand, if you are behind with several
payments in your mortgage obligations, or your equity in the home is significantly more than the amount
of the homestead exemption to which you are entitled, then Chapter 13 bankruptcy will likely be your
best option for saving your home)
WILL THE CHAPTER 13 BANKRUPTCY BE THE
RIGHT CHOICE FOR YOU?
A. Chapter 13
Basically, in Chapter 13 type of bankruptcy, you commit, through a Repayment Plan you are to propose,
to repaying all or a portion of your debts over a period of time under the supervision of the bankruptcy
court, but you get to keep any of your property regardless of its value.
(Contrast that with Chapter 7, which permits you to "discharge" or wipe out most of your debts, but in
return, you are to give up any property you own, except for those which fall under the "exempt"
property category which cannot be seized under the bankruptcy law).
B. When Chapter 13 May Be Right for You
In general, all relevant things considered, the following will constitute an ideal circumstance when it will
make the most economic sense for you to file for Chapter 13 bankruptcy:
1. If you Are an Individual Debtor.
Are you an individual, or filing for bankruptcy as an individual, with personal debts - and not as a
business entity or otherwise? If so, then that would be one important consideration existing for which
filing for Chapter 13 may be right for you. Under the bankruptcy law, only individuals, and not business
entities (corporations, partnerships, etc), are permitted to file for Chapter 13. (If you are an entity such
as a corporation, a Limited Liability Company or a partnership, the proper avenue for you is to file under
the Chapter 11 bankruptcy Code. And, on occasion, particularly when an individual finds himself in high
debt amounts that exceed the debt limits allowed for filers under the Chapter 13 bankruptcy, the
individual may file under Chapter 11 bankruptcy, as well).*
2. If You're a Debtor Who Doesn't Have a Choice But to File For Chapter 13.
Does your determination from the initial calculations you make show that your "current monthly income"
is MORE than the "median income" for the family size you fall under for your state? (See the Monthly
Income & Means Test calculations: CLICK HERE)
And, did you take the "means test" and fail to pass it? If so, you're probably not eligible to file under
Chapter 7, and so you're probably not eligible to file under anything other than Chapter 13.*
Hence, you have practically no other real choice; you've just got to file for Chapter 13.
CLICK HERE for the information on making the above-listed "current income" and "means test"
calculations for determining your Chapter 13 bankruptcy eligibility status.
NOTE: If the result of your initial calculations is that your average monthly income during the 6 months
before filing for bankruptcy is higher than your state's median income, you probably MAY not be able to
qualify for Chapter 7 - at the end of the day, after you shall have made the further calculations (the
"means test") necessary. However, if your initial calculations is that your average monthly income during
the 6 months before filing for bankruptcy is higher than your state's median income, and the result of
your further calculations (the "means test) shows that your disposable income is of the amount that
would allow you to pay your unsecured creditors at least $166 a month over a 5 year repayment period,
then you almost certainly would qualify only under Chapter 13.
3. Your Debts Must Fit Within Certain Limits
Under the bankruptcy law, to be eligible to file for Chapter 13 bankruptcy, your debt structure must fit
strictly within the designated legal limits. Your total debts must not be in excess of:
- $1,010,650 for secured debts (debts for which some property was pledged as security or
- $336,900 for unsecured debts (debts for which NO collateral was pledged).
Do your debts fall within the debt limits described above for your secured, as well as your unsecured,
debts? If so, then that would be one important consideration existing for which filing for Chapter 13 may
be right for you. (See HERE for more on classification of secured and unsecured debts).
4. Do You Owe Certain Kinds of Debts That Are Only Dischargeable in Chapter 13?
Under the new bankruptcy law, there is one category of debts created by the new law which can only
be discharged in Chapter 13, but NOT in Chapter 7. They are:
- debts you owe to an ex-spouse created out of a divorce or settlement agreement, but which
- debts incurred to pay a non-dischargeable tax debt
- court fees, condominium, cooperative and homeowners' association fees
- debts from loans from a retirement plan, and
- debts that could not be discharged in a previous bankruptcy
Determine if you have these kinds of debts listed above. This could be one important consideration
existing for which filing for Chapter 13 may be right for you. (See Chapter 12 for full discussion of these
kinds of debts)
5. You Must Be Employed or Have Steady Income Source
A critical component of Chapter 13 bankruptcy, is that you (the debtor) must show that you are currently
employed and/or have a steady and reliable regular source of income. This is for a rather obvious
reason: you've got to have a steady income in order to be able to fund the payment plan you'll submit
for the repayment of your debts over a 3 or 5 year period of time (the usual length of the plan).
6. You Own a Home or Car with a Lot of Built-Up Equity that you'd Like to Save
Let's say, for example, that you own your own home (or other major investment, such as a car or an
antique) that you've got a lot of built-up equity in, and that you face a foreclosure of the home (or
repossession of the property) because you've been far behind in your payments, but this is an item you
very much need and want to keep. Under Chapter 7 bankruptcy, you'll likely lose your home or the
valuable antique or car. This is simply because of one fundamental fact in bankruptcy: when it conies to
the issue of catching up on unpaid back mortgage payments -called the "curing of an arrearage" -
Chapter 7 bankruptcy simply does not offer a procedure accomplishing that. Doing a Chapter 13, on the
other hand, may be a far better alternative for you in that.
With Chapter 13, the home foreclosure (or other) action on your home can be permanently stopped;
Chapter 13 will allow you the precious time that's needed for you to catch up on the missed payments
over the 3 or 5 year repayment period, and keep the property. (There is one notable exception,
however, when a Chapter 13 bankruptcy filing will not stop a foreclosure, and that is in a situation
where you had filed another bankruptcy case within the previous 2 years and the court had, in that
proceeding, lifted the automatic stay which applied and allowed the mortgage lender to proceed with
the foreclosure).
7. You Own or Owned a Home that is worth Less than you Owe on it, or
You Have an Unmanageable Unsecured Debts.
EXAMPLE: The outstanding mortgage debt owed by Mr. A, a Maine resident, on a house he owned in
another state, was $500,000. His mortgage lender had foreclosed on the house; the house had an
appraised value of $400,000 at its foreclosure. Meaning, in other words, that the house's appraised
value was $100,000 less than Mr. A owed on the house, and so Mr. A still owed a $100,000
"delinquency" debt to his lender on the house. Worried that the lender might come after him for the
$100,000 delinquency, Mr. A even considered whether it would be better for him to file Chapter 7
bankruptcy. He took the "means test" and passed it for Chapter 7.
In this case, it might be a wiser and more economically beneficial deal for Mr. A to go for Chapter 13,
rather than Chapter 7. Why? Because, such delinquency debt is deemed an unsecured debt in
bankruptcy, and if he files for Chapter 13, he could propose to pay as little as $2,000 (total) over a 5-
year repayment plan period on the $100,000 delinquency, plus avoid tax liability on it.
8. You Have a Significant Amount of Property that Is Nonexempt or of Sentimental Value
Do you, perhaps, have a significant amount of property that falls under the category of nonexempt
property, or property that has a great deal of sentimental or special value to you, and which really
matters a great deal to you as a major cause for your seeking to file for bankruptcy? Then, Chapter 13
is probably the better option for you, for the reason that, in contrast to Chapter 7 which will require that
you give up any nonexempt property you own to be sold for the benefit of your creditors, Chapter 13
does not require that you give up any property, regardless of its exempt status or its value — providing,
though, that you've got to be able to afford the "disposable income" for you to fund the Chapter 13
repayment plan for your debts over the next 3 to 5 years.
(For more on the figuring out of how much "disposable income" you'll need to be able to fund a Chapter
13 plan, CLICK HERE).
9. You Have a Vehicle that's Worth Far Less than You owe On it
Proposition: Let's say your present vehicle is a good and reliable car that is in excellent condition which
you'd like to keep, but here's the problem - it's worth far less than you still owe on it in terms of what is
its present actual replacement value in the market. There's one special way that Chapter 13 bankruptcy
could be of great profit for you regarding this. You can possibly avail yourself of what is known as the so-
called "cram down" option that's only available in Chapter 13. The cram down remedy will allow you to
keep the car (the car has to have been purchased more than 30 months before the bankruptcy filing) by
reducing the debt you still owe on the car (let's say it's $19,000) to its current replacement value (say,
it's $15,000) and paying off that replacement amount in equal installments over the life of the Chapter
13 plan, rather than having to pay the full amount you owe on the contract ($19,000 in this example).
10. You Have a Certain Kind of Co-debtor
Do you, perhaps, have a co-debtor involved in your debt who will be protected from liability in your
bankruptcy case under your Chapter 13 plan, but who will not be protected if you file under Chapter 7?
Recall that under the bankruptcy rules, in a Chapter 7 case, even if the debtor who files for the Chapter
7 bankruptcy in a cosigned debt is discharged of the debt, the co-debtor would still be on the hook for it
and still remain liable to repay the debt. Not so, though, with Chapter 13 bankruptcy. With Chapter 13
case, the co-debtor, like the debtor, would also not be liable for the debt for the duration of the
repayment plan - as long as the repayment plan provides for the payment of some or all of that debt.
However, if there is an amount of the debt that you still haven't paid at the end of the plan period, then
the co-debtor will still remain responsible for that part.
11. You Have Certain Kinds of Debts Which Can Only Be Paid Off in Chapter 13
There is one small class of debts or obligations which, under the bankruptcy rules, are classified as "non-
dischargeable* debts, but which can be paid off over time by the debtor only in Chapter 13. In other
words, though these debts still remain non-dischargeable and would not be discharged in bankruptcy
under any circumstances, the debtor would be allowed to pay them off in Chapter 13 bankruptcy. They
include debts like a tax obligation, student loan, or many other non-dischargeable debts in bankruptcy.
Do you, perhaps, have such debts? Then, you may consider looking into filing for Chapter 13 with that
consideration in mind.
(See "Debts that are Dischargeable in Bankruptcy, and Debts that Are Not," for more on this).
IMPORTANT: Note that under the bankruptcy law and procedures, there are certain times and
situations when certain debts which are non-dischargeable debts, will be dischargeable and be
discharged in bankruptcy. See, "When Certain Debts Which Are Non-dischargeable Could Be
Discharged," at ).
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LEGAL DISCLAIMER
The material and contents on this Page, and on ALL the other like pages in this website, are a somewhat detailed LIBRARY of credit
and bankruptcy laws and information (any every other law-related informational material in this whole website), and are primarily
intended for the general information of visitors to this site, and our customers and the American consumer, for their general education
and enlightenment on the subject matter of personal credit and bankruptcy. It is NOT intended, however, as - nor should any reader
of any kind or nature at all ever deem or conceive it in any way, shape or form whatsoever, to be - legal advice on credit or
bankruptcy or any other matter, concerning his or own her particular or specific financial, credit or legal needs or problems relative to
bankruptcy. If you (any reader herein) need any such or other legal advice, you should consult a competent attorney skilled and
knowledgeable in those matters. For the most complete information relating to this, please read our Full TERMS & CONDITION OF USE
of this Website
See Full TERMS & CONDITIONS OF USE OF THIS WEBSITE.
No part of any materials and contents on this website, including, but not limited to, written contents, graphics or logos, may be copied,
photocopied, reproduced, posted, translated or reduced to any electronic medium or machine-readable form whatsover, in whole or in
part, or otherwise used, without the specific written permission and authorization of the Site’s Director. All rights, titles and interests
(including, but not limited to, all copyrights, trademarks, service marks, patents and other intellectual property rights) in this Site, as
applicable, as well as its content, belong to Afford-Bankruptcy.com, and we reserve the absolute rights to prosecute any and all person
(s) or entities, to the fullest extent of the law, who infringe upon any rights hereto in any manner whasoever. And NOTE that when you
read or use this site, you are doing so solely and only under the understandings and the agreement which you’ve duly entered into in
this TERMS OF USE.
LEGAL DISCLAIMER
The material and contents on this Page, and on ALL the other like pages in this website, are a somewhat detailed LIBRARY of credit
and bankruptcy laws and information (any every other law-related informational material in this whole website), and are primarily
intended for the general information of visitors to this site, and our customers and the American consumer, for their general education
and enlightenment on the subject matter of personal credit and bankruptcy. It is NOT intended, however, as - nor should any reader
of any kind or nature at all ever deem or conceive it in any way, shape or form whatsoever, to be - legal advice on credit or
bankruptcy or any other matter, concerning his or own her particular or specific financial, credit or legal needs or problems relative to
bankruptcy. If you (any reader herein) need any such or other legal advice, you should consult a competent attorney skilled and
knowledgeable in those matters. For the most complete information relating to this, please read our Full TERMS & CONDITION OF USE
of this Website
See Full TERMS & CONDITIONS OF USE OF THIS WEBSITE.
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