One of the biggest decisions you’ll make when you file for bankruptcy is which Chapter you’re going to file. For most New York residents who are not also business owners, that’s going to be either Chapter 7 or Chapter 13.
Neither type of bankruptcy is necessarily better or worse. The type you file depends entirely on your situation.
Chapter 7 bankruptcy is a total liquidation. Theoretically, the trustee sells the assets and uses any proceeds of the sale to pay off your creditors, at which point you receive your discharge.
In reality, most Chapter 7 filers don’t end up losing very much property to the process. Most Chapter 7 filers don’t have much in the way of assets. What they do have is usually exempt.
This isn’t always the case, of course, but Chapter 7 filers have to pass a means test. If you have a high enough income to have significant assets you’re usually disqualified. In New York, if you’re a single person, that will mean a median income of $55,333 as of April of 2019. In many of the counties we serve, that’s not an income that gets you very far.
Of course, you also have to pass a disposable income test. Some individuals can make less than the median income but have too much “disposable” income to file Chapter 7. That’s any income you have left over after you pay for necessities such as food, clothing, housing, and medical care.
That said, some Chapter 7 filers have homes with equity in excess of the exemption. When this happens they have to make a tough decision: do they file Chapter 7 and lose the home, or do they file Chapter 13?
Chapter 13 is known as the “wage earner’s” bankruptcy. It’s intended primarily for individuals who have a decent income.
In Chapter 13 you keep all your assets, but you submit a schedule of all your expenses and agree to a strict payment plan. Your lawyer will propose the plan for you after working with you to come up with what you think you can pay. The trustee then approves or rejects the plan.
Once the plan is in place you’ll make payments every month for 3 to 5 years. The trustee will distribute those payments.
You’ll work closely with the trustee throughout the plan. You’ll have to report any major windfalls, for example, and if you want to finance a purchase you’ll need court approval.
Once the plan is completed, the courts discharge the remainder of your debt.
There are other advantages to this plan besides keeping your assets. Chapter 13 doesn’t remain on your credit report as long as Chapter 7 does.
And for some individuals, Chapter 13 is an ideal way to buy time. For example, you might want to sell your home to keep a foreclosure off your credit report, but need more time to do it than the foreclosure process typically allows for. Chapter 13 gives you the breathing room to resolve this issue.
There are many other factors that go into the decision, too many to list here. They depend on your individual case, financial situation, and goals.
That’s why it’s so important to take advantage of your free consultation. You’ll get a chance to discuss all these issues, to ask your questions, and, most of all, to make sure you’re filing bankruptcy the right way.
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