Bankruptcy is a powerful tool for getting your finances back on track. There are two main types of bankruptcy: Chapter 7 and Chapter 13. Which one is right for you?

Chapter 7 Bankruptcy

Chapter 7 is also called “liquidation.” When you file under Chapter 7, the first step is to divide all of your assets into two groups: exempt and non-exempt. Exempt assets are protected and creditors can’t touch them. For example, California has an exemption that can cover up to $75,000 of equity in a home. To find the equity, take the value of your home and subtract the amount you owe on the mortgage. If it’s less than $75,000, your home is exempt. California offers two different systems of exemptions and you can choose which one best fits your needs.

Non-exempt assets, on the other hand, become part of your “bankruptcy estate.” They will be sold by the bankruptcy trustee and used to pay your creditors. If you have a large asset, like a home, that isn’t totally covered by the exemption, you may end up having to sell it. You’ll get the amount of the exemption back and the rest of the proceeds will go to your creditors. However, that will only happen if your equity is much more than the exemption. Most debtors are completely covered by the exemptions, so they don’t have to give up any property.

At the end of the Chapter 7 process, your remaining unsecured debts (like medical or credit card debt) will be “discharged.” That means they’re completely wiped out and you no longer owe those creditors anything. If you have secured debts, like a mortgage or a car loan, you’ll need to work with the bankruptcy trustee and the court to decide whether you want to give up that property or try to keep making payments.

Who Can File Chapter 7?

Because most debtors don’t end up paying any of their unsecured debts in Chapter 7, the courts limit it to the people that really need it. You’ll have to meet certain requirements in order to qualify. You’ll qualify automatically if your average income for the 6 months before you file is less than the state median income. For cases filed after November 1, 2016 in California, that’s about $4,300 per month for a single-person household. You can find the current median income numbers for different sizes of household here.

If you make more than the average income, you’ll have to pass the “means test.” The court will take your monthly income and subtract certain expenses to find your disposable income. Most of those expenses are based on national, state, and local standards – not your actual expenses. If your disposable income is low enough, you can still file under Chapter 7.

Chapter 13 Bankruptcy

If you don’t want to file under Chapter 7 or don’t qualify, you can file under Chapter 13. In that case, you’ll work with the court to come up with a payment plan based on your disposable income. As part of that payment plan, you’ll make up back payments on your secured debts and continue to make your current payments. Whatever part of your monthly payment is left over will go to your unsecured creditors.

In most cases, a Chapter 13 payment plan lasts for 5 years. At the end of that time, your remaining unsecured debt will be discharged and you’ll continue to make your regular secured debt payments.

In order to qualify for a Chapter 13 bankruptcy, you’ll need to show that your creditors will get at least as much as they would under Chapter 7. In other words, you’ll need to figure out what assets would not be exempt. Now compare that value to what your creditors will get under your payment plan. If they’ll get less under Chapter 13, you’ll need to file under Chapter 7.

Which Is Right For Me?

So which type of bankruptcy is best for you? The answer depends on your unique financial situation and needs. Chapter 7 is a great way to wipe out large unsecured debts, if you qualify. Chapter 13 is a good choice if you have assets that wouldn’t be exempt under Chapter 7, like a home with a lot of equity.

The best way to decide is to visit an experienced bankruptcy attorney for a consultation. They can help you evaluate whether bankruptcy is the right choice for you. If you decide that it is, they can help you decide which chapter will best meet your needs and goals. Finally, they can help you file your case, negotiate with creditors and the bankruptcy court, and handle all the logistics of the process.

Image Credit and License

Sometimes, it’s just not possible to make ends meet. Unexpected expenses, illnesses, or changes in employment can wipe out even the most careful budget and leave us behind on our bills. Once that happens, it’s all too easy for the debt to pile up. And unless a lucky Powerball ticket turns up, it can be nearly impossible to dig back out again on your own. That’s where bankruptcy protection comes in – it’s designed to help you get your finances back on track and get out from under that pile of debt.

How Bankruptcy Works

To file a bankruptcy in California, you need to start by tallying up all of your assets and all of your debts. When you file with the bankruptcy court, you need to include all of that information. The court will then notify all of your creditors so that they can take part in the bankruptcy process. If you leave creditors out, bankruptcy won’t affect your debt to them. If you leave assets out, you may face penalties including the dismissal of your case.

The Automatic Stay

Once you file a bankruptcy, you get instant protection from repossessions, foreclosures, wage garnishment, and other collection actions. That’s called the “automatic stay,” and it’s a way to make sure your creditors have to go through the bankruptcy court rather than coming after you personally. From there, you’ll work with the court to reorganize your debt and assets and potentially pay some of the debt.

Secured vs. Unsecured Debt

You can have two different types of debt: secured and unsecured. Secured debt is linked to a piece of property – usually your home or your car. If you don’t make payments on those debts, your lender can repossess that property or foreclose on your home. If they sell the property and it doesn’t cover the whole debt, you’ll typically have to pay the remainder (the “deficiency”).

Unsecured debt, on the other hand, is not linked to any particular property. If you don’t make payments, your lender can only sue you for collection. They may then ask the court to garnish your wages, levy your bank accounts, or put liens on your property in order to try to collect. The most common types of unsecured debt are medical and credit card debt.

Secured and unsecured debts are treated differently in bankruptcy. If you have secured debts, you’ll need to choose whether you want to keep that property or not. If not, you can surrender it and you won’t have to pay the deficiency. If you do want to keep that property, you can work with the court and your lender to reaffirm your debt and continue to make payments.

As far as unsecured debts go, the outcome depends on what type of bankruptcy you file. If you file a Chapter 7 bankruptcy, you’ll have to sell any non-exempt assets and the proceeds will go to your creditors. However, most debtors’ assets are completely exempt and they don’t have to pay anything. If you file a Chapter 13, part of your monthly payment may go toward your unsecured debt. In either case, whatever unsecured debt is left over at the end of the bankruptcy process is “discharged” – wiped out forever. You can learn more about the different kinds of bankruptcy here.

After Discharge

After you receive your bankruptcy discharge, you get to start over with a much cleaner financial slate. You may still be making car or home payments, but your credit card and medical debt will be gone. Your credit score will drop, but it was probably already damaged if you were behind on your bills. Plus, that’s a small price to pay to have the threat of garnishment and other collection actions lifted.

It is possible to file a bankruptcy on your own, but the rules are complicated and you may end up paying more than you have to or even having your case dismissed. In general, it’s much easier to file with the help of an attorney, and you’re more likely to be successful. An attorney can help make sure you’ve covered all your bases and that as much of your property as possible is safe.

Image Credit and License