Whether you’ve recently suffered an unforeseen loss, contested divorce, or debilitating medical condition, filing for bankruptcy may constitute a realistic option for you and your family. Bankruptcy is not the end—rather, it is a systematized judicial process designed to protect you from harassing creditors and give you a new beginning. If you’re in the preliminary stages of researching your options for filing an individual bankruptcy petition in federal bankruptcy court, you’re likely wondering about the difference between Chapter 7 and Chapter 13 bankruptcy, and for which chapter you may qualify.
Assuming you are considering individual bankruptcy options, as opposed to options available for business entities, your choice is generally between Chapter 7 and Chapter 13 bankruptcy. Chapter 13 bankruptcy, also referred to as a wage earner’s plan, could be thought of as a restructuring of your debt, similar to refinancing a mortgage.
To qualify for Chapter 13 bankruptcy, your unsecured debts must total less than about $400,000, with secured debts of less than $1.2 million. Furthermore, you must be a wage earner with income potential enough to make payments on your consolidated debts for a three- to five-year period. The higher your income, the longer the bankruptcy court will expect you to remain on a payment plan before discharging your eligible debts.
If you qualify for Chapter 13 Bankruptcy, you are eligible to save your home from foreclosure, unlike during a Chapter 7 liquidation proceeding. Chapter 13 bankruptcy also serves to protect you from contact with your creditors, who will receive payment only through a bankruptcy trustee appointed by the court.
With the exception of certain debts, if you abide by the terms of your Chapter 13 payment plan, the court will generally order a discharge of your remaining debt following the expiration of your payment period. If, however, you violate the terms of your chapter 13 plan, the court may consider converting your case to a liquidation case—that is, a Chapter 7 bankruptcy case.
Chapter 7 Bankruptcy is the form of bankruptcy that typically comes to mind when you use the term. It is a liquidation—that is sale—of your nonexempt assets, possibly including your home. The money is then distributed in priority order to your creditors, and your remaining eligible debts are generally discharged thereafter. A Chapter 7 bankruptcy, unlike a Chapter 13 bankruptcy, does not require a payment plan, which is why petitioners with limited income will often elect to file for Chapter 7 bankruptcy and take advantage of the following specific New York asset exemptions:
When it comes to filing for Chapter 7 bankruptcy, choosing whether to use New York or federal exemptions and the limits thereto can prove complicated, and this generally requires the assistance of a New York individual bankruptcy attorney. However, because it allows for a variety of exemptions, Chapter 7 does not require a payment plan, and generally discharges your remaining debts, many debtors have abused it. For this reason, not every individual debtor qualifies to file for bankruptcy under Chapter 7.
The ideological underpinnings of a debt-release “jubilee” date back to ancient times, and even appear in the U.S. Constitution. Over the years, bankruptcy law has undergone a multitude of changes to both adapt to an evolving financial world and prevent abuses.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, however, marked a major change in United States bankruptcy law. The biggest change that came out of the 2005 amendments was known as the “means test” in consumer bankruptcy cases. Before this test (which we will addressed later) was established, debtors could discharge debts nearly unconditionally while retaining their non-exempt assets. Declaring Chapter 13 bankruptcy, in which the debtor could choose to pay off certain creditors on a repayment plan, was actually voluntary, essentially based on an individual’s underlying morals.
The main purpose of the 2005 amendments was to curb abuse of the Chapter 7 system by debtors who could actually afford to pay at least some of their debts but elected not to do so. Courts now have the option of dismissing a Chapter 7 bankruptcy petition if they find that debtors have abused the system. In making an abuse determination, the “means test” is used to determine whether the debtor can afford to make certain payments to creditors—and as a result, is ineligible to file for a Chapter 7 bankruptcy. If the court determines that a debtor has sufficient means to pay certain creditors, the case may be converted to a Chapter 13 bankruptcy case.
Codified in 11 U.S.C. § 707, the court, on its own or via motion by the trustee or party in interest to the case, may dismiss/convert a Chapter 7 case if an individual’s debts are primarily consumer debts—that is, debts incurred for personal, family, or household purposes—and if the debtor has sufficient “means” to make certain payments. Enter the means test.
If the debtor’s monthly income exceeds the state median, about $60,000 in New York, the court is required to apply the test. In layperson’s terms, the means test takes the debtor’s current monthly income and subtracts the following allowable expenses up to a certain amount:
If after deducting your monthly expenses it is clear that your net income is either more than $12,850 or 25 percent of your unsecured debt over a five-year period, abuse of Chapter 7 is presumed. Debtors must overcome this presumption of abuse to remain in Chapter 7 bankruptcy, which they can do by showing special circumstances for the court to consider. This is where an experienced Long Island bankruptcy attorney can prove particularly helpful.
When it comes to the means test, what qualifies as an allowable expense might surprise you. You may deduct your dental visits, expenses for your minor child’s education, payments on secured debts, and even certain administrative and legal fees.
If you are truly suffering under the burden of your debt, Ronald D. Weiss, P.C., Attorney at Law can help to ensure that you take advantage of every deduction available to you so that what you present to the court during a Chapter 7 proceeding means test is a true reflection of your allowable expenses.
Even if your case is converted to Chapter 13, Ronald D. Weiss can help structure your repayment plan. , serves Long Island bankruptcy and foreclosure clients in both Nassau and Suffolk Counties. He can analyze the specific facts of your case to determine the best course for you and your family. Contact him today online or at (631) 479-2455 for a no-risk consultation.