September 19, 2014 by Steve Levine

Filing for Bankruptcy – Things to Consider

photo credit: Team Lane

Filling for bankruptcy is a big decision – both financially and emotionally. Whether you should file for bankruptcy depends on your individual circumstances. Reading an article or going over a checklist only gives you the information; ultimately – it is up to you to decide. However if you have already decided to file for bankruptcy, there are a number of things you should be aware of.

Types of bankruptcy

Factors such as your income, expenses and amount of debt will determine whether you should file for Chapter 7 or Chapter 13 bankruptcy. Both types have specific requirements and it’s best to get acquainted with each before you proceed further.

Chapter 7 Bankruptcy

You must successfully pass the means test to qualify for Chapter 7 bankruptcy. This test is basically comprised of taking your average monthly income for the past 6 months and comparing it against the median income for a household that resembles yours in your state. If your income is below the state median you can consider that you have passed and you can apply for Chapter 7 bankruptcy without filling out the entire form. If, however, your income is above state median you will have to complete the entire form and take into account a number of expenses to see if your income is low enough to qualify for this type of bankruptcy.

Chapter 13 Bankruptcy

This type is a bit different in that you have to propose a repayment plan to pay back a part or all of your debts over a 3 to 5 years time span. This means that you must have enough disposable income to be able to make these monthly payments. Another requirement is that you must not have more than $1,149,525 in secured debts or $383,175 in unsecured debts.

Which one is right for me?

If you don’t meet the requirements of Chapter 7, Chapter 13 bankruptcy may be your only solution. But there are cases where filing for Chapter 13 has more advantages, even if you are eligible for Chapter 7.

In Chapter 7, the bankruptcy trustee is appointed to sell all your nonexempt property in order to pay off the debts to the creditors. If you have a lot of assets, this can be a big disadvantage. However, if you file for Chapter 13, the bankruptcy trustee only has to approve your repayment plan, allowing you to keep your property in exchange for meeting the monthly payments as set out in the plan.

In addition to this, Chapter 13 bankruptcy provides debtors who meet certain requirements with benefits such as:

  • Reduce the principal balance of your investment property mortgage or car loan with a cramdown. A cramdown is basically a way to reevaluate the value of an asset in order to reduce the amount of secured debt that you own. This reduces the amount you have to pay and can also lead to a reduction in the loan’s interest rate.
  • Eliminate your second mortgage or other unsecured junior lien through the process of lien stripping. This works if the value of the home is lower than the amount you own. In such cases filing for Chapter 13 can allow you to strip a second mortgage home equity line of credit (also known as HELOC) from your home.

Should I file for bankruptcy with my spouse?

If you are married, you have the option to file for bankruptcy either individually or jointly.

The benefits of an individual filing are more obvious when:

  • Only you or your spouse has debt
  • One spouse has property that may be endangered if filling for bankruptcy. Note that in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin marital assets are considered property of the bankruptcy estate.
  • The state you reside in does not allow for doubling of exemptions in joint cases.

However if both you and your spouse have many joint debts, a joint filing for bankruptcy will provide you with doubled bankruptcy exemptions (this depends on each state individually).

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