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Bankruptcy is a legal process designed to allow an individual or business to settle all their debts when they find they are unable to meet their obligations. In the United States, there are two commonly used options when you file for bankruptcy protection; Chapter 7 and Chapter 13. Each chapter has separate eligibility criteria to determine which option is most suitable.
In addition to these two well known types, there are 4 others. Chapter 9 is municipal bankruptcy, Chapter 11 is business reorganization, Chapter 12 applies to family farmers and fisherman, and Chapter 15 is for ancillary and international firms. The overwhelming majority of bankruptcy filings in the USA are Chapter 7.
Chapter 7 bankruptcy is for individuals who owe more than they can pay and are seeking a complete discharge of all debts. It is important to note that this option is only for settling of unsecured debts, such as credit cards, personal loans, remaining balance on car loans after repossession and medical bills.
Secured loans, such as car loans and mortgages cannot be settled under Chapter 7. These assets will be seized by the creditors, resulting in repossession of the car and foreclosure of the house. You cannot file for bankruptcy to discharge student loans, taxes, fines, child and spousal support and legal settlements.
In 2005, the US government enacted several significant changes to the bankruptcy laws, the most important being the "means test." Under this section, when a debtor is going to file for bankruptcy, they must provide their monthly income, based on an average of the last six months. This test is applied only to debtor whose income is above the state median income.
Deductions for obligations not included when you file for bankruptcy are subtracted from the monthly income. Standard valuations for living expenses are deducted based on the state of residency and disposable income is the value that remains. If this value is greater than $182.50 US Dollars (USD) per month, you must file Chapter 13 bankruptcy.
If the disposable income is less than $6,000 USD, you qualify for Chapter 7. If it is more than $10,000 USD, you do not qualify. If it falls between $6,000 and $10,000 USD and you are able to pay at least 25% on your unsecured debts, you must file Chapter 13. The calculation of what is included and excluded is complex and requires the assistance of a bankruptcy attorney.
In Chapter 13 bankruptcy, the debtor maintains ownership of all the assets and must make monthly payments for the next three to five years to repay creditors. If you have the financial means to pay at least a portion of your debts, you can file for bankruptcy under Chapter 13.
If you are able to pay just the monthly minimum payments, contact a credit counselor. There are alternatives to bankruptcy that can help. These options include negotiating a lower interest rate and paying a portion of the overall debt.