Your Debt Choices
Understanding Bankruptcy
If you are struggling to pay your monthly credit cards bills, you may be wondering if bankruptcy is an option for you. Bankruptcy provides a path to a fresh start, financially, but not everyone qualifies.
Your Debt Choices
If you are struggling to pay your monthly credit cards bills, you may be wondering if bankruptcy is an option for you. Bankruptcy provides a path to a fresh start, financially, but not everyone qualifies.
For whatever reason, your finances have gone sour, you’re drowning in debt, you’re sure you learned your lesson, so you scream for help: “Just give me a second chance!”
Bankruptcy will do that.
Bankruptcy is a legal do-over for consumer or business owners.
You can petition U.S. Bankruptcy Courts to release you from debt and let you start your financial life with a clean slate.
Two-thirds of the people filing bankruptcy in 2019, did so using Chapter 7 and their debts were discharged 94.3% of the time.
If you filed the second most popular form of bankruptcy, Chapter 13, the success rate dropped to 44.4%, but that’s usually because the judge thinks you can manage your debts with the assets you have. In other words, the judge believes you’re going to be OK, so, it’s a success either way.
Bankruptcy is most often associated with someone living paycheck-to-paycheck, but it’s just as likely to happen to professionals and business owners.
Officially, there are six types of bankruptcies:
99% of bankruptcy cases filed in 2019 were Chapter 7 (liquidation) or Chapter 13 (personal reorganization).
Qualifications and limitations on bankruptcy.
Chapter 7
Some people refer to Chapter 7 bankruptcy as “liquidation bankruptcy’’ because it discharges most of your unsecured debt by liquidating your assets. Going away are unsecured debts like credit cards, personal loans and medical bills.
It’s the quickest, simplest and most common type of bankruptcy, but first, you must qualify.
To qualify for Chapter 7 bankruptcy, you must pass Part 1 or Part 2 of your state’s means test. Part 1 has to do with income. If your household income is less than your state’s median income, you qualify. Remember that median income means half the people in the state have more income, half have less. If you have less, you qualify for Chapter 7.
If you have more than the median income, there is still a chance to qualify through Part 2 of the “means” test. In Part 2, you must document all your allowable expenses for the previous six months (rent, food, transportation, clothing, medical expenses, etc.) and subtract that from your income.
What’s left is called “disposable income” that can be applied to debt. If you’re disposable income is low enough, compared to your debt obligations, you may qualify for Chapter 7.
If you qualify for Chapter 7, it means the court trustee will sell non-exempt assets to pay off creditors. The definition of non-exempt assets varies from state-to-state, but just about anything that has value could be included. That means a nice car or home that has some equity, jewelry, art or stamp collections, musical instruments, electronic devices, etc.
The whole process for Chapter 7 can be completed in 6-8 months.
Chapter 13
Chapter 13 bankruptcy is also known as “reorganization bankruptcy.’’ You offer the judge a repayment plan that allows you to pay back creditors in 3-5 years. No property is required to be liquidated. For Chapter 13 bankruptcy, you must have regular income to make the required monthly payments.
There also are debt limit qualifications for Chapter 13 that you can’t exceed. You must have less than $394,725 in unsecured debt or less than $1.184 million in secured debt.
You will make monthly payments on your debts for 3-5 years and can’t take out any loans during that time. If you fail to make the payments, you likely will be back in court and your discharge rescinded.
Chapter 11
Chapter 11 bankruptcy is somewhat similar to Chapter 13, but it’s typically reserved for businesses. Essentially, it’s a reorganization or restructuring of the company. It’s possible for businesses to file for Chapter 7 bankruptcy, but that means a liquidation of assets, so Chapter 11 is a more attractive option. That allows businesses to maintain their assets and continue operations, but they must devise a plan to pay off some of their debt or get it forgiven.