In many cases, Chapter 7 bankruptcy is a better fit than Chapter 13 bankruptcy. For instance, Chapter 7 is quicker, many filers can keep all or most of their property, and filers don’t pay creditors through a three to five year Chapter 13 repayment plan. But not everyone qualifies to file for Chapter 7 bankruptcy and in some cases; Chapter 7 doesn’t provide the help the filer needs. Advantages of Chapter 7 BankruptcyChapter 7 bankruptcy is an efficient way to get out of debt quickly, and most people would prefer to file this chapter, if possible. Here’s how it works: Who Should File for Chapter 7 Bankruptcy?Chapter 7 works very well for many people, especially those who: You’ll take the means test to see if your income qualifies for this chapter. If your income is below the average income for a family of the same size in your state, you’ll automatically qualify. If your income is higher than the median, you’ll have another opportunity to pass. However, if after subtracting allowed expenses, including payments for child support, tax debts, secured debts (such as a mortgage or car loan), you have income left over to make a significant payment to your creditors (called disposable income more below), you won’t qualify to file for Chapter 7 bankruptcy. Chapter 7 bankruptcy isn’t the best choice for everyone. Chapter 7 won’t help people whose debts won’t get wiped out (discharged), like certain income tax debt, student loans, and domestic support obligations. High-income filers find it hard to qualify. It’s also not a good fit for people who would lose substantial equity in a home or other property if they filed for Chapter 7 bankruptcy, or those facing foreclosure or repossession. For those individuals, Chapter 13 bankruptcy would likely be a better choice. Most people prefer Chapter 7 bankruptcy because, unlike Chapter 13 bankruptcy, it doesn’t require you to repay a portion of your debt to creditors. In Chapter 13 bankruptcy, you must pay all of your disposable income the amount remaining after allowed monthly expenses to your creditors for three to five years. Disposable IncomeDisposable income is the amount that remains after subtracting allowed bankruptcy expenses from your monthly gross income. Your disposable income will determine whether you qualify to discharge (wipe out) debt in Chapter 7 or Chapter 13 bankruptcy. When you claim your deductions, you’ll be able to use the actual cost of some expenses. For others, such as the allowance for food, clothing, and housing, you’ll use the national and local standards. Here’s a list of some of the deductions you’ll be allowed to take: In a Chapter 7 case, you’ll complete the Chapter 7 Means Test Calculation form. You’ll deduct allowed expenses to find your disposable monthly income. Next, you’ll multiply that amount by 60 months. If the figure exceeds the maximum amount currently allowed (which will be listed on the form), you won’t qualify for a discharge. Additionally, you might not qualify if your disposable income is sufficient to pay 25% or more of your unsecured, nonpriority debt (such as credit card balances, medical bills, and personal loans). In a Chapter 13 matter, you’ll fill out the Chapter 13 Calculation of Your Disposable Income form. The amount that remains after deducting expenses is your monthly disposable income. You’ll pay that number to your unsecured, non-priority creditors each month over the course of your three- to five-year repayment plan. Because each case is different, determining whether you qualify for bankruptcy can be challenging. When in doubt, contact a knowledgeable bankruptcy attorney. Here are a few other things filers find challenging about Chapter 13 bankruptcy: Here are common mistakes you should avoid before filing for bankruptcy. Lying about Your AssetsChapter 7 bankruptcy includes a “means test,’’ a requirement that you disclose all of your assets and income, which determines your capacity to pay off creditors. If you purposely leave out assets or income, trying to help your qualification, your case could be dismissed. You could also be banned from filing on those debts ever again. Eventually, a bankruptcy trustee will have access to your financial records, so it’s unlikely your deception will go unnoticed. You shouldn’t try to hide any creditors, either, because credit-card companies have centralized and computerized information. They will all know you have filed for bankruptcy protection. Bottom line: Tell the truth. Not Consulting an AttorneyBankruptcy law is too complicated for the average consumer to understand. Bankruptcy attorneys know all the subtleties, which might escape uninformed people. Example: If you have a child with a part-time job while still living with you and being claimed as a dependent their earnings must be counted toward household income. Attorneys should know legal ways to protect assets that could be at risk. It might be tempting to save money in this do-it-yourself era, but it’s probably not worth the trouble or risk. Giving Assets (Or Payments) To Family MembersThis is a major red flag. You can’t give away your good stuff cash, property, cars, jewelry, electronics to friends or relatives with the understanding they will give it back later. It’s dishonest. Giving your car to a family member just before you file for bankruptcy is a clear-cut way to lose the car. If you own the car, it must be listed as an asset or if you still owe money, it must be listed as a liability. Running Up Credit Card DebtThis won’t work, either. The mentality of using your available credit before filing for bankruptcy will catch up to you. After receiving the bankruptcy notification, if the creditor believes you ran up your credit-card balance before filing, it can challenge the request to eliminate some or all of what you owe him. You could end up owing money on your credit cards, even after the bankruptcy is over. Usually, any credit purchases you make within 90 days of filing for bankruptcy are not included in the bankruptcy debts. You might have to pay your credit-card debt in full and creditors could accuse you of fraudulent borrowing. To be safe, once you choose to file bankruptcy, you should stop using the credit card. Taking on New DebtEven more than credit-card use, it’s especially irresponsible to take on new debt, especially if you tap into a home equity line. Again, the prudent course is to suspend all debt once you know bankruptcy is the step you’re going to take. Raiding the 401(k)If you think it’s good business to raid your 401(k) or IRA retirement accounts to stash away some money or pay off some creditors shortly before filing for bankruptcy, think again. First, paying off some creditors (but not others) is not allowed under the bankruptcy code because you are favoring one creditor over another. More importantly, though, your retirement accounts are exempt when filing bankruptcy so it makes no sense. IRAs, Roth IRS, SEP and Simple IRAs, Keogh plans, 401(k) accounts and pension plans are exempt, so they can’t be seized by creditors or a bankruptcy trustee. Transferring Property to Family or FriendsThis is illegal and a certain way to derail your bankruptcy efforts. You are not allowed to transfer any assets for the purpose of protecting them. Not Doing Your ResearchNot all debt is covered by bankruptcy. Student loans, tax debt, child support and alimony payments are not dischargeable. Do your research and lean on the information offered by trained professionals. Reasons to Consider Filing for BankruptcySurveys agree that job loss and medical debt are the two biggest reasons for considering bankruptcy. Many times, the two team up and light a torch to a family’s financial plans. Health problems can make it difficult or even impossible to do your job. The result is you either quit or are let go by the company. That is a toxic combination because you lose your source of income at precisely the same time expenses go up. There are some other, less imposing situations that could cause you to consider bankruptcy. You might be headed down that road if: Free Initial Consultation with LawyerIt’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!
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