You are in financial trouble if you owe more than you can pay. It happens more often than you think. One day you are purchasing or making financial commitments that seem reasonable, the next day you find yourself in a deep financial hole. That is a frightening realization, one many Americans are confronted with every day. Whether you are a business or an individual dealing with daily bills, you have to decide if bankruptcy is the way to go. If you decide to move in that direction, there are factors to consider before choosing which type of bankruptcy best suits your situation.

Which One to Choose and Why

The best way to choose between Chapter 7 and Chapter 13 bankruptcy is to review your income, your assets, and the possibility of your property being repossessed.

Income Requirements

One of the first factors to consider is your income. If you are married and your spouse works, both incomes are likely to be considered. If your joint income is too high, you will not be allowed to file for bankruptcy under Chapter 7. The means test used to calculate income is designed to limit the use of Chapter 7 bankruptcy to those who can’t pay their debts. The test amount is calculated by your monthly income over the 6 calendar months before you filed for bankruptcy, resulting in the disposable income figure. If your median income is above your state’s median average income, and you have enough disposable income to pay a minimum amount to your unsecured creditors, you need to file under Chapter 13.

Equity in Assets and Property

Bankruptcy exemptions only protect a certain amount of equity in your assets. If your assets are worth more than the allowed bankruptcy exemptions, you could lose some of those assets under Chapter 7. However, you could keep your property under Chapter 13 by paying slightly higher bankruptcy repayment installments.  

Repossessions and Foreclosures

If you are behind on your mortgage payments, Chapter 7 probably will not help in the long term. You would need to catch up on your mortgage payments, refinance the mortgage loan, or apply for a mortgage modification. However, Chapter 13 stops foreclosure by allowing you to catch up on the mortgage payments through your bankruptcy repayment plan. Likewise, if you cannot afford your car payments, Chapter 7 may not help. The lender will want full payment of the past-due payments or payment of the loan in full. If the car is worth less than is owed on the car, you may be able to redeem the car (pay what the car is worth) to satisfy the debt, but you must pay the amount all at one time. Under Chapter 13, you can spread out car payments over several years to lower the payment. In some cases, you can “cram down” the amount owed to pay off the car loan if the car is worth less than the loan payoff, and you owned the vehicle for at least 910 days before filing under Chapter 13. Confusing, I know.

Hiring a Bankruptcy Attorney

An experienced bankruptcy attorney can help you sort out your bankruptcy options. The last thing you want to do is choose the wrong option and find out in the end that you cannot meet the requirements. Hoverson Law has been helping people sort out their financial options for 30 years. If you live in Minnesota and want to talk to someone about your bankruptcy options, call us now at (612) 349-2728. We know that it’s confusing, and we are here to help.