Chapter 7? Chapter 13? I Need a Fresh Start, But Which Option is Best for Me?

figure confusing arrowConsumers who are overwhelmed with debt have two options in Bankruptcy Court. The most popular option by far is Chapter 7, where the consumer’s debts are eliminated without a repayment plan. But Chapter 13 is also a powerful tool for adjusting your debts over a three-to-five year time frame. Which one is right for you?
The Means Test and the Consequences
A good starting point is the “Means Test.” This is part of the so-called “bankruptcy reform” laws Congress passed in late 2005. There is a lot to the means test, but for a simple illustration purposes the consumer’s gross income for the past six (6) months must be calculated. Once this number is known, you pretend that the six-month average is in fact an “annual” income amount. The annual income is compared to the “median income” for the State in which the consumer lives. For a table of median income amounts, click here.
If your current monthly income is less than the median, then you will normally sail right through Chapter 7. No presumption of abuse will usually arise under these circumstances. If your income is above the median, then you will have to perform the means test calculations to see if you “pass” the means test. Passing in this context means that the amount of money left over after taxes, benefits and other payroll deductions are considered, and then the daily expenses of life are considered, there is either a negative or a negligible amount of money is left over. Again, let me emphasize, there is a lot more to the means test than this simple illustration. Some income is not really income, some things you may not realize as income are actually income, and you can’t just pick your own expenses to consume your income. An attorney’s guidance is needed to complete the means test.
But assuming that after the means test you have a meaningful amount of money left over, the only option is to file a Chapter 13. This is a court-protected plan of debt re-organization. The consumer’s wages are garnished at work, if they are employed. If they are not a wage earner, arrangements are made for the consumer to mail or electronically transfer in the payments to the Chapter 13 Trustee. The Chapter 13 Trustee then pays off the various creditors over a period of time. The time length is normally 36 months if the consumer is below the median income, or 60 months if the consumer is above the median income.
The United States Trustee and Some Other Considerations
It is a cruel reality that just passing the means test is not an iron-clad guarantee that your Chapter 7 filing won’t be examined. There is a government agency, the United States Trustee, which looks over Chapter 7 means tests with a fine-toothed comb. Their job, among many other jobs they perform, is to try to find a way to force even those consumers who “pass” the means test into a Chapter 13. Again, an experienced bankruptcy attorney who has fought these battles can tell you about likely outcomes for your situation.
In general, Chapter 7 is the preferred option for consumers who have lots of dischargeable debt, like credit cards and medical bills, but no assets (or, they have assets, but they are exempt.) For an article about Ohio exemptions, click here.
If you have non-exempt assets, if your income is substantially above the median, if you own your own home and are in foreclosure due to missing mortgage payments, then these are typical issues best addressed in Chapter 13. Chapter 13 is also used by consumers with income tax problems.
This article is not designed to give you specific legal advice, but rather to give you a general idea about options available in bankruptcy court. To schedule your free consultation with me, call me at 216-642-8234. I will review your particular situation and give you my best recommendation based upon your circumstances.

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2 Responses to “Chapter 7? Chapter 13? I Need a Fresh Start, But Which Option is Best for Me?”

  1. Frank medved says:

    I am 78 yrs old, Traded my 2010 Toyota w 50000 miles on a 2015 jeep June 2015 didn’t get credit for it.
    I just realized it in nov 2015. Can I file bankruptcy just on this lease.

    • Blake Brewer says:

      Yes you can file bankruptcy on just one debt. I have to question why someone of that age would need protection in bankruptcy, but call me today at 216-642-8234 and we can schedule your free consultation today.

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