As a consumer, what Chapter of Bankruptcy is right for you?
A Chapter 7? A Chapter 13? A Chapter 20?
A Chapter 7 Bankruptcy involves the collection and liquidation of non-exempt assets. The proceeds of the non-exempt assets are distributed to your unsecured creditors. A Trustee will be appointed to your Bankruptcy case to administer your Bankruptcy estate. The Trustee is able to sell any non-exempt property for the benefit of your unsecured creditors.
Unfortunately, not everyone is able to file a Chapter 7 Bankruptcy. To qualify for a Chapter 7 your income and expenses will be examined to determine if your income level falls below the median income level for Kansas or Missouri.
Median income levels based on family size are set for each state to determine who will have the option of filing a Chapter 7 case. Your median income is based on the average of your last six months of income. Your income will include: income from an employer, self-employment income, retirement, investment income, rental income, and contributions to your household from others, etc. The current median income levels for each state can be found at the U.S. Trustee’s website.
If your last six months of income is below the median income level for your state and family size, you will have the option to file a Chapter 7 Bankruptcy case.
If your last six months of income is above the median income level for your state and family size, you will have to “pass” the means test. The means test was created to determine if you have disposable income to pay back your creditors. The means test will average your last six months of income, deduct standard living expenses and monthly payments to secured creditors. If you pass the means test after taking these certain deductions into consideration, then you will be allowed to file a Chapter 7 Bankruptcy case. If you do not pass the means test, you will need to consider filing a Chapter 13 case.
A Chapter 13 Bankruptcy or “wage-earner” Bankruptcy case allows you to pay your creditors through a repayment plan approved by the Court. The Plan in your Bankruptcy case will range from 3 – 5 years depending on your income. If your income falls below the state’s median income level you may propose a plan length of 3 years. If your income is above the state’s median income level you will most likely have a 5 year plan.
A Trustee will be appointed to your Bankruptcy estate to ensure you abide by the plan requirements. The plan payments are paid to the Trustee to distribute to creditors. Depending on the Bankruptcy case a wage order can be submitted to your employer to make the payments directly to the Trustee from your paycheck or you can be responsible for direct payments to the Trustee.
You have the option of filing a Chapter 13 Bankruptcy as long as some qualifications are met. One of those qualifications is your secured and unsecured debt amounts cannot exceed the limits set for a Chapter 13.
The current debt limits for a Chapter 13 became effective April 1, 2013. The debt limits are adjusted every three years by the Judicial Conference of the United States. The next adjustment will become effective April 1, 2016. The current debt limits for noncontingent, liquidated, unsecured debts is $383,175.00 and for noncontingent, liquidated, secured debts is $1,149,525.00.
If you exceed either the debt limits for secured or unsecured, you will be ineligible to file a Chapter 13. Depending on your situation there may still be options available under the Bankruptcy code.
For example, you may be able to file a Chapter 20 Bankruptcy. Although, there is no “Chapter 20” in the Bankruptcy Code, it refers to a process where a consumer files and receives a Chapter 7 discharge and then files for a Chapter 13 Bankruptcy (7+13=20). This is done in cases where filing only for Chapter 7 or Chapter 13 fails to provide adequate relief for the consumer.
You must first file a Chapter 7, discharging the necessary unsecured debt, and then file a Chapter 13 to gain protection from the Court as necessary on secured and priority debt owed. The rules regarding discharge and how often you can file Bankruptcy still apply. This means you will not receive a discharge in your Chapter 13 if it is filed within 4 years of your Chapter 7 discharge.
The reason you would file a Chapter 20 Bankruptcy is not to receive a discharge in the Chapter 13 case. The motivation would be very situation specific:
- You need to get caught up on your home or car loan
- You need court protection while paying back tax debt
- You need court protection while paying back student loan debt
- You have multiple mortgages of which one (or more) may be stripped
As with any Chapter of Bankruptcy that you file, you must make sure that it is filed in good faith. Life happens. You may have filed a Chapter 7 last year but have since experienced a change in your financial situation: job change, job loss, medical emergency, or divorce for example. Many are surprised about the options truly available. Our Kansas City Bankruptcy Attorneys always provide free consultations to review your situation. You can find out what Chapter may be right for you, call or email us today!