Chapter 7 (Fresh Start)
Most people who have to file a bankruptcy want to get a fresh start and get it over with. You will not be allowed to file a chapter 7 (fresh start), however, if you have excess income.
Chapter 13 (Wage Earner)
In a Chapter 13, your attorney prepares a plan which sets out how much money you will be paying to the trustee each month and how you want the trustee to apply the funds. If the judge agrees that your plan is feasible, it will be approved (confirmed). Then you make the monthly payments to the trustee for 36-60 months, and the trustee applies the funds as provided in the plan. The creditors receive a portion of the amount owed to them while you pay into the plan. When you finish making the plan payments the amounts not paid to the dischargeable creditors are discharged (wiped out). The means test may require that your chapter 13 plan be 60 months long and that you pay a certain amount of money, so it is very important that your means test is prepared by an experienced bankruptcy attorney.
If you earn more than you need to live on (Excess Income)
One of the documents you have to file with your bankruptcy is a budget which demonstrates to the court how much income you have each month and how much you need to pay your taxes and living expenses. If your budget shows that you have income you do not need to pay taxes and live on, the court will require that you pay that excess income over to a trustee for a three to five year period in partial payment of the creditors. The plan under which you make those payments to the trustee is known as a “Chapter 13″ or “wage earner” plan. The attorney’s will help you determine whether or not you have excess income based upon the information you provide at your free initial consultation.
Even though you may not really have any excess income, you may be forced into a Chapter 13 case by a calculation called the “means test” which is required under the new bankruptcy law. The means test is a projection of your future income, but it is not based upon your real income. It is based upon your income in the six calendar months before the month in which you file your case. For example, you may have lost your job this month and have no income now but the means test will pretend you have income based upon what you made in the past 6 months. The calculations in the means test are 6 pages long and make your tax return look like a coloring book. In some cases, you can avoid a chapter 13 by waiting a month or two to file your case. In other cases, you need to file before the end of the month in order to avoid being forced into a chapter 13. Only an experienced bankruptcy attorney can do your means test and advise you when to file your case. The attorneys will calculate your means test for your and advise you when to file based upon the information you provide at your free initial consultation.
Advantages of a Chapter 7 (Fresh Start)
A Chapter 7 is usually over in about 3 months, and there are no monthly payments to make. Most people get to keep all their property, and most debts are wiped out.
Advantages of a Chapter 13
A Chapter 13 can do several very important things that a Chapter 7 cannot. A chapter 13 can spread your delinquent taxes out over 3-5 years and protect you from the IRS while you pay. A chapter 13 can stop a foreclosure on your house and let you pay off the arrearage (back payments) over 3-5 years. A Chapter 13 can also wipe out certain debts which would not be wiped out in a chapter 7. The attorneys will advise you whether you should file a Chapter 13 or a Chapter 7 at your free initial consultation based upon the information you provide.