Deciding to file for bankruptcy is a difficult decision that requires a great deal of planning and consideration. Before making that decision, however, you should be aware of your options when it comes to filing for bankruptcy. Most bankruptcies are filed under Chapter 7 of the Bankruptcy Code, but some people may find that their only option is a Chapter 13 bankruptcy. An attorney specializing in bankruptcy law can help you decide which option, if any, is right for you.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy can be a fairly quick process (3 to 6 months, generally) and will give you a fresh start financially. Most of your unsecured debt, including medical bills and personal loans, will be eliminated and protect you from harassment from creditors. While some of the things you own may be exempt from bankruptcy, property that is not exempt from sale will be taken away. Additionally, certain obligations (e.g. student loans, alimony, child support) and debts (e.g. mortgage lien) will remain, even once the Chapter 7 bankruptcy is finalized.
Chapter 13 Bankruptcy
The main difference between Chapter 7 and Chapter 13 bankruptcy is that filing for Chapter 13 bankruptcy requires that you restructure your debt, rather than eliminate it altogether. Under a Chapter 13 Bankruptcy, you will need to create a payment plan that requires you to pay back your debts over the next three to five years and your debts will have to be paid out of the disposable income you have left after necessities. However, the advantage is that you will be allowed to keep your home, your car, and other non-exempt assets. Another advantage is that creditors cannot come after you to pay in full if you have successfully completed your repayment plan.
Am I eligible for a Chapter 7 bankruptcy?
Before you decide whether to file for Chapter 7 or Chapter 13 bankruptcy, you will need determine whether you are even eligible to file for debt forgiveness through Chapter 7 bankruptcy by taking the means test. If your monthly household income is less than the median income for an Oregon household of your size (based on the past six months of income), you will automatically pass the means test and be eligible to file under Chapter 7.
However, if your income is higher than the median, the means test will be used to determine whether you would have enough disposable income after paying expenses to pay off unsecured debts. If your disposable income is low enough, you can still qualify for Chapter 7 bankruptcy. If not, you can either file for Chapter 13 bankruptcy or wait to take the test again after six months if you know your situation will change.
A bankruptcy can negatively affect your credit for years to come, as both Chapter 7 and Chapter 13 bankruptcies can stay on your credit report for up to 10 years. However, many people find that filing for bankruptcy is the best way to get their financial lives back under control.