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Which Type of Bankruptcy Is Right for Me?

August 19th, 2019 at 2:15 pm

bankruptcy-typeIn the United States, there are many different types of bankruptcies, some being for businesses, government sectors or individuals. If you are an individual filing for bankruptcy, the two most common types of bankruptcies that are filed are either Chapter 7, which is a liquidation bankruptcy, or Chapter 13, which is a reorganization bankruptcy. Each type of bankruptcy has its advantages and disadvantages, along with different sets of criteria to qualify for each type of bankruptcy. If you are unable to pay your bills each month or you are struggling to make ends meet, bankruptcy may be in your best interest. Choosing the right type of bankruptcy for your situation can be the key to your financial success.

Chapter 7 Basics

A Chapter 7 bankruptcy is also known as liquidation bankruptcy. This is because all of your “unnecessary” assets will be liquidated to help pay off some of your debts before your debts are forgiven. Most unsecured debts, such as credit card debt, will be discharged in a Chapter 7 bankruptcy, meaning you will no longer be responsible for paying them. It takes roughly three to four months to complete a Chapter 7 bankruptcy, which is a relatively short time frame.

To qualify for a Chapter 7 bankruptcy, you must pass a means test, which is a test that is used to determine whether or not you are actually able to repay your debts. If you pass the means test or your income is less than the median income level for Texas, you will most likely qualify for a Chapter 7 bankruptcy. If you earn too much, you may be denied.

Chapter 13 Basics

A Chapter 13 bankruptcy is known as reorganization bankruptcy because your debts will be reconfigured into affordable monthly payments. This type of bankruptcy allows you to repay some or all of your debts over the course of three or five years, depending on your income. At the end of the repayment period, the rest of your unsecured debts will be discharged. Chapter 13 bankruptcies allow the person filing to keep all of their property, even property that is deemed to be a “luxury” item in Chapter 7 bankruptcies.

Those who earn too much income to qualify for a Chapter 7 bankruptcy may qualify for a Chapter 13 bankruptcy. Most people who have regular monthly income can qualify for a Chapter 13 bankruptcy because there are no income requirements. However, a person must have less than $419,275 in unsecured debt and less than $1,257,850 in secured debt.

Unsure of Which Type of Bankruptcy You Should Go With? Contact a New Braunfels, TX Bankruptcy Lawyer

Filing for any type of bankruptcy has consequences that you must deal with after everything is said and done. Though these consequences sometimes differ depending on the type of bankruptcy you choose, they can still affect your life. If you are wondering which type of bankruptcy would be best for your financial situation, or if you should file for bankruptcy at all, a skilled San Antonio, TX bankruptcy attorney can be an invaluable asset. Contact the Law Offices of Chance M. McGhee today to see how we can help you find solutions for your debt. Call our office at 210-342-3400 to schedule a free consultation.

 

Sources:

https://upsolve.org/learn/every-type-of-bankruptcy-explained/

https://www.credit.com/debt/filing-for-bankruptcy-difference-between-chapters-7-11-13/

More New Bankruptcy Dollar Amounts Effective Soon

February 24th, 2016 at 8:00 am

Here are the rest of the important changes affecting Chapter 7 and Chapter 13 bankruptcy cases filed on or after April 1, 2016.

 

Our last blog post a couple days ago described how every 3 years many of the dollar amounts within the bankruptcy laws are adjusted for inflation. The next set of these adjustments will be effective April 1, 2016. The changes don’t apply to ongoing bankruptcy cases but only to new ones filed on or after that date.

The upward adjustments are relatively small, reflecting a 3% or so increase in the consumer price index over the last 3 years. But because these changes affect so many aspects of consumer bankruptcy, they are worth noting.

Our last blog post described a couple of the increased amounts. Here are the rest that are worth your attention. (You can see the entire list as just published by the federal Judicial Conference .

Maximum IRA Exemption

In general, retirement funds are exempt (protected for you from your creditors) when you file a bankruptcy case. However, there is a cap on money that you can exempt in traditional individual retirement accounts (IRAs). The relatively high cap started out in 2005 at $1,000,000. Through inflation that cap will now be at $1,283,025. (Section 522(n) of the Bankruptcy Code.)

This cap does NOT apply to either “SEP IRAs” (Simplified Employee Pensions) or “simple IRAs” (Savings Incentive Match PLans for Employees).

A Limit on Recently-Acquired Homestead Exemption

If you live in or are considering moving to a state with a very high or unlimited homestead exemption (Massachusetts, Texas, and Florida, for example), you could be limited in how much of your state’s homestead exemption you could use. This limit only applies if you acquired the property in the 1,215-day period before filing bankruptcy. If so, the state homestead exemption limit is being increased from $155,675 to $160,375. (Section 522(p)). Since most state’s homestead exemptions are lower than this new limit, only homeowners filing bankruptcy in very high or unlimited homestead exemption states are affected by this increase.

Chapter 7 “Means Test” Calculation

The Bankruptcy Code’s “means test” contains a rather complicated formula for determining whether there is a “presumption of abuse” when a person files a Chapter 7 “straight bankruptcy” case. The purpose of this formula is to help determine whether you have the “means” to pay a meaningful portion of your debts within a Chapter 13 payment plan. If the formula says that you do have the “means” to do so then you are said to be “presumed” to be abusing the bankruptcy law if you are filing a Chapter 7 case.

This formula includes elements like your “disposable income” (your income minus allowed expenses) and the amount of your unsecured debts. It also includes some specific dollar amounts.

It’s these specific dollar amounts that are being increased. We’ll explain how this works in an upcoming blog post. For now know that the result is that in some circumstances you can have a little more disposable income and still qualify for Chapter 7. (Sections 707(b)(2)(A)(i)(I & II) and 707(b)(2)(B)(iv)(I & II).)

Chapter 13 Debt Limits

You can have an unlimited amount of debt when you file a Chapter 7 bankruptcy. But there are debt limits when filing a Chapter 13 “adjustment of debts for an individual with regular income.”

There are separate maximum amounts of unsecured debts and secured debts. Having too much of either type of debt disqualifies you from Chapter 13. The unsecured debt limit is increasing from $383,175 to $394,725 and for secured debt is increasing from $1,149,525 to $1,184,200. (Section 109(e) of the Bankruptcy Code.)

Length of Chapter 13 Plan

Whether your plan is obligated to last 3 years or instead 5 years turns on the comparison of your “current monthly income” with the published “median family income” amounts for your size of family in your state.

These published “median family income” amounts only include household sizes of from 1 to 4 individuals. For larger households, you add a stated dollar amount for each additional individual in the household to come up with the appropriate “median family income” for the household. This monthly additional dollar amount per additional household member is increasing from $675 to $700 per person. (Sections 1322(d) and 1325(b).)

Priority Debts for Wages and Benefits

Assume that you are not filing bankruptcy yourself but your employer is. You’re owed wages and employee benefits for work you did.

The bankruptcy law favors you by making the employer’s debts to you for unpaid wages and benefits “priority” debts. “Priority” debts must be paid in full by the debtor before other “general unsecured” debts are paid anything.

There are certain conditions to meet for wage and benefits debts to have this favored “priority” status. One of those conditions is a maximum amount that a wage or benefits debt can be “priority.” (Sections 507(a)(4) and (5).)

That maximum for “priority” wages is going up from $12,475 to $12,850. There is a separate and identical maximum for unpaid benefits payments by your employer, which is also increasing to the same $12,850 amount.

Next…

In the next several blogs we will more fully explain how these upward adjusted amounts work to potentially affect your bankruptcy case.  

 

Qualifying for Chapter 13

August 10th, 2015 at 7:00 am

Chapter 13 “adjustment of debts” gives you extraordinary advantages over creditors, especially over certain kinds of creditors.  

 

Here’s the sentence we’re exploring today:

You can file a Chapter 13 case if 1) you are “an individual,” 2) you have “regular income,” and 3) the amount of your debts does not exceed the legal limits.

Chapter 13

Filing a Chapter 13 case gives you extraordinary power over particular kinds of creditors. Here’s a sampling of what it can do:

  • You may qualify for a vehicle loan cramdown, enabling you to significantly lower your monthly vehicle loan payments, avoid having to catch up on any late payments, and greatly reduce how much you pay before the vehicle is yours free and clear.
  • You can catch up on back child and spousal support as your budget allows, without your ex-spouse or support enforcement being allowed to garnish wages and accounts or to suspend your driver’s or occupational licenses.
  • Older income tax debts may be paid pennies on the dollar and the rest written off forever.
  • Newer income tax debts can be paid off over time—over as long as 5 years—without any accruing interest and penalties throughout that time, and without the IRS/state being able to chase you on those debts.
  • You may be able to “strip” your second (or third) mortgage from your home’s title, so you never have to make those monthly payments again, greatly reducing the debt against your home, making keeping the home more sensible for the both for the short term and long.
  • You may write off non-support debts owed to an ex-spouse after paying little or nothing on those debts.

Chapter 13 is for “Individuals” Only

Only “individuals”—human beings—can file a Chapter 13 case, according to the U.S. Bankruptcy Code.

An individual and “such individual’s spouse” may file a joint Chapter 13 case.

Unlike Chapter 7 “liquation” or Chapter 11 “reorganization,” a business entity—a corporation, limited liability company (LLC), or business partnership—cannot file a Chapter 13 case in its own name.

If you are an owner or partial owner of a business that IS in one of these legal forms, you may file a personal Chapter 13 case to deal with the debts—personal and business—on which you are personally liable.  But the business itself cannot file under Chapter 13. It either doesn’t file any bankruptcy case (for example, if it has no assets at all, or if it can continue operating without bankruptcy help), files a Chapter 7 case to liquidate its assets, or files a Chapter 11 case to reorganize under court protection.

If you are an owner or partial owner of a business that IS NOT in one of these legal forms but instead is a “sole proprietorship,” you and your business can file bankruptcy in your name, including under Chapter 13. That’s because there’s no legal separation between your personal and business assets and debts.

You Must Have “Regular Income”

You can’t just be any individual but must be an “individual with regular income.” That phrase is defined in the Bankruptcy Code as one “whose income is sufficiently stable and regular to enable such individual to make payments under a plan under Chapter 13.”

That definition is not very helpful. How “stable and regular” does your income need to be before it is “sufficiently stable and regular”?  How does a bankruptcy judge make that determination at the beginning of a Chapter 13 case, especially if it’s an income source that has had some irregularities in the past (such as from self-employment)?

The ambiguousness of this definition gives bankruptcy judges lots of flexibility about how they apply this qualification. Most give you the benefit of the doubt at the beginning of the case, giving you the opportunity to make the monthly Chapter 13 plan payments to see if you can establish that your income is “stable and regular” enough. On the other hand, if your income has truly been very inconsistent, you and your attorney may have to fight hard to persuade the judge that your income is steady enough to qualify.

Debt Limits

If you file a Chapter 7 case there is no legal limit on how much debt you can have. But under Chapter 13 there are maximums, separate ones for total secured and total unsecured debts.

Chapter 13 debt limits were imposed back in the late 1970s when the modern Chapter 13 procedure was created.  Congress wanted to restrict this relatively streamlined procedure to relatively simple situations. For people with very large debts, the more elaborate Chapter 11 “reorganization” was considered more appropriate.

Originally the debt limits were $350,000 of secured debts and $100,000 of unsecured debts. In the mid-1990s these limits were raised to $750,000 and $250,000 respectively, with automatic inflation adjustments to be made every 3 years thereafter. The most recent of these adjustments applied to cases filed starting April 1, 2013 and through March 31, 2016, with a secured debt limit of $1,149,525 and unsecured debt limit of $383,175. These limits apply whether the Chapter 13 case is filed by an individual or by an individual and “such individual’s spouse”—they are NOT doubled for a joint case.

Reaching EITHER of the two limits disqualifies you from Chapter 13.

These limits may sound high, and indeed are not a problem for most people who want to file a Chapter 13 case. But be careful because certain kinds of debts can skyrocket and exceed these maximums. For example, a vehicle accident involving serious personal injuries, especially if more than one person was injured, can result in hundreds of thousand dollars of debt shockingly fast. Also, individual liability on business debts can accrue quickly.

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210-342-3400

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