Deciding to enter into bankruptcy is a painstaking process where you will want to carefully consider all your options. One important decision that will need to be made is choosing the type of bankruptcy, typically between either a Chapter 7 or Chapter 13. In this article, the bankruptcy attorneys at the Lam Law Firm go into the details of why a Chapter 13 Bankruptcy may be the best option for your situation.
What is a Chapter 13 Bankruptcy?
A Chapter 13 Bankruptcy is very different from a Chapter 7 liquidation bankruptcy. A Chapter 13 is a reorganization bankruptcy where a payment plan is created by your attorney so that you are paying back a percentage of your debt to certain creditors over a period of time.
Liquidation will not occur and usually debtors are permitted to keep all of her property, whether it is exempted or not so long as the Chapter 13 plan complies with the law.
A Chapter 13 will cost you more in attorney’s fees than a Chapter 7 simply because it is more complicated and can last anywhere between 3-5 years for the completion of the plan.
Reason 1 – You make too much money!
When your average yearly income is above the set median for the number of people in your household, you do not qualify to file for a Chapter 7 Bankruptcy.
For example, if you are a household of 2 in South Carolina you must earn $49,523.00 or below per year to qualify for a Chapter 7 filing. If you earn above this amount for a household of 2, your attorney must consider you for a Chapter 13 bankruptcy.
Your attorney will require you to provide 6 months of pay stubs from any source of employment, business earnings, or government benefits in order to conduct the MEANS test. This test became a requirement in 2005 with many changes to the bankruptcy code. The MEANS test will consider your 6 months income multiplied by 2, to calculate your annualized yearly income.
Reason 2- You Are Behind on your Home but want to keep your home
Remember in a Chapter 7 Bankruptcy you must be current on your mortgage at the time of filing in order to keep your home. Most debtors are not ready to surrender their home in a Bankruptcy and this is their last resort if they wish to keep their home.
In a Chapter 13 bankruptcy, your attorney will include the amount of money you are behind on your mortgage (Arrearage) into the Chapter 13 Plan to be paid back over a period of time.
Let’s say that you are 12 months behind on your home and your monthly mortgage is $1,000.00 per month. I tell my clients at this point, in a 5 year plan (60 months) you are looking at paying a minimum of $12,000/60 months= $200.00 per month.
Keep in mind that this number does not include the % you are paying back to unsecured creditors. I like to give my clients this bare bone number because it helps them realize if they can afford the Chapter 13 bankruptcy plan or not. If you know that you do not have $200.00 extra a month in disposable income after paying your regular mortgage payments outside the plan and other living expenses, chances are you won’t have enough to pay into the plan.