Would Chapter 13 Bankruptcy be a better option?

Two forms of bankruptcy are available to typical consumers: Chapter 7 and Chapter 13. The essential difference is that while Chapter 7 completely removes the obligation to pay for certain debts, Chapter 13 simply renegotiates the payment plan.

In Chapter 13, you and your creditors negotiate a new payment plan under the supervision of the bankruptcy court. Often this repayment plan will be for a smaller amount than you originally owed to your creditors. Any debt not included in the payment plan is then erased.

There are many reasons why Chapter 13 may be more attractive to you. Here are a few possibilities:

1. You wish to avoid a foreclosure on your home, or seizure of secured property.
2. To prevent a co-signor on your debt from becoming liable for the entire amount.
3. You own your house and don’t want it to be sold by the federal bankruptcy trustee.
4. Your income is too high to qualify for Chapter 7.
5. You already filed for Chapter 7 in the past eight years. By law, you may not file another Chapter 7 within eight years of a previous filing.

Be aware that Chapter 13 bankruptcy is almost always available to you, even if you already filed for a Chapter 7 bankruptcy recently.

What about that new law that was passed in 2005? Doesn’t it get rid of Chapter 7 as an option?

In short – no. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) went into effect on October 17, 2005. What the law does is:

1. Impose stricter documentation requirements on debtors who wish to file for Chapter 7;
2. Provide some new formulas for determining whether a debtor qualifies for Chapter 7; and
3. Require that all debtors receive credit counseling at an approved debt counseling agency.

It is important to note that you must complete a certified debt counseling course before filing for bankruptcy. These courses run about $50 (although the counseling agency is required to offer the course for free if you show extraordinary economic hardship) and take about an hour. Be aware that courts have been interpreting this counseling requirement very strictly and aren’t accepting most excuses for not attending.

The second major change is that the new law imposes a “Means Test” on all Chapter 7 filers. In essence, the Means Test simply means that if your real income is greater than your state’s median income level, you cannot file for Chapter 7 bankruptcy and must file for Chapter 13 instead. Of course it is much more complex than that, but your bankruptcy attorney can make all the necessary calculations to see if your income level qualifies you for Chapter 7 bankruptcy.

Contrary to media hype, most debtors who are filing for bankruptcy in good faith are going to pass this test. Some experts say that as many as 70 percent of Chapter 7 filers will be able to pass the means test and have their debts discharged.

There has been a lot of panic and media spin about this new law. But contrary to popular opinion, it does not “take away” Chapter 7. It makes Chapter 7 filings more complex and difficult, but Chapter 7 Bankruptcy is still a real option for you.

However, the increased complexity of the new Chapter 7 bankruptcy process makes it more important than ever to have competent legal assistance to guide you through this process.