I am having some problems paying bills, and my friends say I need to file bankruptcy to protect myself. What is the difference between Chapter 7 and Chapter 13 and how do I know which one I should use? (Posted by Elaine2 on the Forum.)
Editor's Response:
The answer depends on the type of debt you have, your income, your assets, and other factors. Under Chapter 7 bankruptcy, the most common filing for individuals, the debtor (you) can often receive a discharge of many types of unsecured debt (credit card debt is an example of unsecured debt, while your mortgage and car loan are examples of secured debt). However, to determine if the consumer qualifies for Chapter 7 relief, the court will apply a newly implemented means test that is designed to identify consumers who are able to repay some of their debts. The test is too complex and case-specific to describe here, but, in a nut shell, it compares the debtor's average income for the past six months to the median income for households of the same size in the debtor's state. If the debtor's income is less than or equal to the state median income, the debtor passes the means test and may file for Chapter 7 bankruptcy.
Chapter 13 bankruptcy is more focused on protecting the debtor while allowing her to repay all or part of her debt. The court develops a repayment plan that protects the debtor from collection actions and then discharges unpaid balances on dischargeable debt at the successful conclusion of the plan. Although Chapter 7, with its focus on discharging debt, may seem more attractive, there are situations where it may be in the consumer's best interest to choose Chapter 13, such as if the consumer's debt is secured or the debt is not dischargeable under Chapter 7 (such as taxes or child support). So, for example, if the debtor has a job but is in danger of loosing her house because she is behind on payments, she would likely seek protection under Chapter 13. On the other hand, a person who satisfies the means test discussed above and has only dischargeable debt, such as credit card debt, would likely file for Chapter 7 protection.
Truly, bankruptcy law is complex, and it is not an area where The Editor can recommend self-representation. Many bankruptcy attorneys will provide free consultations, and that is probably the best way to get information about your specific situation.
For more information or to post a question, visit our MA Bankruptcy Discussion Forum.