The current global financial crisis caught many Americans unprepared for a downturn of the scale that has happened. As a consequence, many Americans found themselves in a situation where their financial liabilities far outpaced their ability to keep up without access to easy credit. The tightening of the credit markets in response to the current crisis inevitably led to a radical increase in the number of bankruptcies filed in the United States.
Many people considering filing for bankruptcy think of the more traditional Chapter 7 bankruptcy procedure first. This typically involves the wholesale liquidation of the petitioner’s assets, although there are some items that are exempt. Most unsecured debts, like credit card debt and medical bills, are discharged and those debts that are not discharged tend to be rescheduled. Today, the United States Trustee who oversees Chapter 7 bankruptcies also imposes a strict means test, which may deny Chapter 7 relief to persons making enough money that the bankruptcy claim appears to be “abusive”.
However, there is an alternative to Chapter 7 bankruptcy available, Chapter 13 bankruptcy.
Chapter 13 bankruptcy is also known as “reorganization” bankruptcy because it involves reorganizing the debtor’s finances in such a way as to allow eventual repayment. The Chapter 13 option is useful for people that have nonexempt assets that they wish to keep (assets that would be liquidated under Chapter 7) or people that have a predictable income and can technically pay off their debt if it is adequately restructured. Importantly, Chapter 13 also extends special protection to third parties that may be liable for debts, such as a co-signer or spouse. Unlike a Chapter 7 liquidation that discharges debt within a few months, Chapter 13 filings lead to the creation of a Chapter 13 reorganization plan that remains in effect for three to five years.
To be eligible for Chapter 13 filing, the debtor has to demonstrate that he will have a steady and reliable income over the period of the Chapter 13 plan. Further, once showing that this income will be available, required living expenses are subtracted from the predicted income. If there is enough money remaining to make significant headway in paying down the debt the filing will be allowed. Another restriction refuses Chapter 13 relief to people with more than $ 336,900 in unsecured debt and/or $ 1,010,650 in secured debt.
One rather peculiar restriction strictly forbids stockbrokers and commodity brokers from receiving Chapter 13 relief even if it is solely for their personal finances. Other than these basic restrictions, Chapter 13 relief is available to most people.
In general, the Chapter 13 filing process is complex and requires the assistance of a professional. Due to the nature of the process, most professionals will expect payment upfront before they take on a client. This means that if a debtor is considering a Chapter 13 filing, it is recommended that they do so before the situation becomes too desperate. Chapter 13 bankruptcy can be ideal for indebted professionals and others
Wendy Polisi is the founder of Finance the Dream which offers Rent to Own Homes and Lease Options throughout the United States. To find out more about how they can help you get into your dream home, please visit them at financethedream.com. To learn more about Improving Credit Score, please visit her blog.
So you passed the Means Test and are eligible to file under Chapter 7. That means you’re in the clear, right? Not necessarily.
In most cases, it is true that passing the means test will also mean that Chapter 7 is an option for you. However, that is really only the first step to pass. Your Trustee may still object to your Chapter 7 bankruptcy, even if there is no “presumption of abuse” under the Means Test.
The next thing the your Trustee will look at is your monthly expenses compared to your monthly income. If you have too much “excess income” the Trustee will insist on you converting to a Chapter 13 repayment plan. So, if you complete your schedules and you end up with a couple hundred dollars of income above your monthly expenses, that is a problem. For that reason, it is very important to calculate your monthly expenses accurately. Make sure that you include all of your expenses. For instances, you are allowed entertainment expenses, day care, new baby expenses, pet expenses, personal grooming, education expenses for you and your minor children, etc. Unfortunately, one thing that you are not allowed is a contribution to a 401(k) or other retirement plan or even to repay a loan from a 401(k). So, if a large amount is being dedicated to either of those in a month, it may cause a problem.
Another thing a Trustee may object to is loan payments on unnecessary items. So, you may have an asset with a loan against it so that the asset has little or no equity. You may think that is great because you can exempt the asset and keep it. However, if the Trustee determines that you don’t need that asset, you may still end up not only losing the asset but also being forced into a Chapter 13.
One example of this is owning an extra parcel of real estate. Oddly enough, if you have a cottage on it, you will likely be able to keep the asset. However, if it is a vacant parcel that you do not have a current use for, the Trustee may very well decide that you do not need that lot. Another example that I have personally seen is a $20,000 tractor. Because the debtor was not a farmer, the Trustee determined that the tractor was really just a toy. So, even though it was exempt, the Trustee objected to the debtor keeping the tractor. This same rationale could apply to any number of assets, including things like expensive cars, boats, trailers, etc.
If the Trustee decides that one of your assets is a toy, the Trustee can force you to surrender the asset. As if that’s not bad enough, you will then also likely be forced into converting your bankruptcy to a Chapter 13. The reason for that is that the loan payment and any amounts paid for insurance, taxes, operation, etc. are not now needed in your monthly budget. So, the money that was budgeted for those is now freed up and available to pay to your unsecured creditors.
The moral is, just because you qualify for Chapter 7 under the Means Test, don’t automatically assume you are in the clear.
Take a good look at your entire petition and really analyze your assets and your expenses.
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Getting pressured by testy bill collectors may make you want to consider chapter 7 bankruptcy to gain a fresh start. But, not before analyzing all of your bankruptcy alternatives. According to the following facts of the new bankruptcy law, filing this form of bankruptcy may cause a very ugly start.
The beauty of chapter 7 is that it helps you discharge all or most debts. But, below are 12 reasons why it may not provide the sexiest debt relief:
1. It Remains on Credit Reports for 10 Years
Chapter 7 is the most damaging effect on your credit score. For up to 10 years, you can ruin chances of getting credit cards and major loans.
2. You Must Wait Eight Years to Reapply
After discharge, you must wait eight years to re-file and if another financial disaster strikes, there’s no protection.
3. Credit Counseling Session and Debtor Education Requirement
Before you can file for chapter 7, you must complete a counseling session. Additionally, you won’t be able to discharge debts until you complete Debtor Education with an approved credit counseling organization.
4. Joint Account Holders Are Not Protected
Although your financial obligations may dissolve, any joint account holder or co-signer will be liable for any debts that are discharged.
5. Non-exempt Property Must Be Sold
If your home has non-exempt equity, the trustee may attempt to sell it to repay creditors. Additionally, non-exempt property, such as stamps and coins, family heirlooms, money in bank accounts, stocks, bonds, or a secondary vehicle or home, must be sold to pay off creditors.
6. To Qualify For Chapter 7 You Must Pass a Means Test
The “means test” determines if your income is low enough for you to qualify for chapter 7. If you fail the means test, you need to file for chapter 13.
7. Your Court Case Can Easily Get Dismissed
Your bankruptcy case can be dismissed due to any of the following:
Failing to complete credit counseling requirements;Lying on the official bankruptcy forms;Hiding your property so it won’t be sold or liquidated;Failing to file the correct forms or to pay the filing fee;Failing to appear at the meeting of creditors.
8. Student Loans Are Not Regularly Discharged
Student loans are difficult to discharge. To do so, you must show that paying the student loan would create an undue hardship on you and your dependents.
9. State and IRS Income Taxes May Not Be Discharged
Most state and IRS taxes and money borrowed on a credit card to pay off taxes generally cannot be discharged. To do so, they need to meet the following criteria:
The tax is for a year for which a tax return is due more than 3 years prior to the filing of the bankruptcy petition;The tax return was filed more than 2 years before the petition was filed;The tax was assessed more than 240 days prior to filing of the petition;The tax was not due to a fraudulent tax return and the taxpayer did not attempt to evade or defeat the tax;The tax was not assessed at the time of the filing and the tax was unsecured.
10. Unpaid Debts for Child Support or Alimony Can Jeopardize Your Bankruptcy
If your payments on child support or alimony are delinquent, you cannot discharge your debts.
11. You Can’t Discharge Debts from Willful or Malicious Misconduct
If a creditor proves in court that you willfully or maliciously tried to discharge a debt, you’ll have to repay the debt.
12. You Can’t Discharge Debts for Injury or Death from Driving While Intoxicated or for Criminal Fines and Penalties and Forfeitures
Any debts resulting from intoxicated driving cannot be discharged. Additionally, any money that you owe for fines or restitution to the court or a victim due to a criminal type proceeding cannot be discharged.
You can learn more about chapter 7 in Wikipedia. The key is to learn your bankruptcy alternatives before deciding on the best debt relief option to your specific needs.
Vic Chevalier is a financial coach and author. He has written numerous articles for blogs and http://www.debtfreeleague.com/, offering invaluable debt relief and credit restoration tips.
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