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What Type of Bankruptcy Should I File? Serving Families Throughout Massachusetts and Connecticut

The average American has over $90,000 in debt from credit cards and medical bills to mortgages and student loans. As the COVID-19 moratorium on some loans expires, many people find themselves in more debt than ever. However, bankruptcy (as scary as it sounds) can bring some much-needed relief from these debts. Read on to learn about the types of bankruptcy and what option may be best for you.

It's a Numbers Game

Bankruptcy is a form of debt relief that can help you liquidate, restructure, or otherwise manage debt. There are many types of bankruptcy to choose from, so it's important to understand what bankruptcy can and can't do based on your situation.

For starters, while filing for bankruptcy can stop some creditors, bills, loans, and card balances, it can't stop all of them. Unfortunately, creditors can still foreclose or repossess property you can't afford. Essentially, bankruptcy eliminates debts but not liens. So, what in the world is a lien?

A lien is the right to keep property belonging to another person in debt until the debt is discharged or paid off. As mentioned previously, bankruptcy can't remove a lien, and the creditor can still collect property with a lien as collateral.

Bankruptcy also can't make child support and alimony go away. These are obligations from a court order, not "debts" per se. You still have to pay these obligations regardless of your financial situation unless you modify the court order.

Student loans can be discharged in bankruptcy, but only if you can't pay them due to "undue hardship." As you might expect, this is a strict standard to meet, and the bankruptcy court is less than sympathetic in most cases. Unless you have proof that your circumstances prevent you from paying your loans now or in the foreseeable future, you may need to look into other options.

Ultimately, filing for bankruptcy is a numbers game. If you have too little debt, you won't qualify, and if you have too much of the wrong kind of debt, you'll have to find another option. But, don't be discouraged – many debts you are probably struggling with can be discharged through bankruptcy. Let's keep reading to learn about your options.

Chapter 7

Bankruptcy is a powerful tool, but not every type of bankruptcy is right for everyone. Chapter 7 is one of the most common types of bankruptcy, and it's often called "liquidation." Individuals and businesses can file for Chapter 7 as long as the disposable income is low enough to pass a means test.

The means test measures monthly expenses against your income and compares the result with the median amount for a similar household in your state. If you pass, you can move on with the process, but if you fail, you won't be able to file for Chapter 7.

After the means test, the discharge process takes about three to four months. Your belongings will be divided into exempt and nonexempt property, and anything in the nonexempt pile is sold off to pay creditors. Exempt property is what you need to keep a job and maintain a standard of living.

The big draw of Chapter 7 is that you can discharge debt relatively quickly and get a fresh start. You won't be able to avoid foreclosure or repossession, but speaking to an attorney can go a long way toward helping retain as many assets as possible.

Chapter 13

Another common bankruptcy option for individuals is Chapter 13 or "reorganization." While you can usually avoid foreclosure and repossession, Chapter 13 isn't for the faint of heart or those without a legal representative.

To qualify for Chapter 13, you can't have more than $419,000 in unsecured debt or $1.2 million in secured debt.

  • Unsecured debt is anything not backed by collateral. This means that if you default on the loan, the creditor cannot recover their investment because you never offered assets as security for the loan. These debts often include medical bills, personal loans, and/or credit card debt.
  • Secured debt is backed by collateral, which means the creditor or lender can seize the collateral and sell it to pay back your debt. Most secured debts are mortgages and car loans. For example, if you can't pay off a mortgage, the bank might take your house.

If you meet the qualifications for Chapter 13, you will need to present a payment plan that includes your debts and a realistic payment schedule. Most reorganization plans take three or five years to complete, and you must pay all debts in that time.

Thankfully, you can keep your property and catch up on loans, but if your debt exceeds the maximum limit for Chapter 13, you should discuss your situation with a qualified lawyer.

The Bottom Line

Bankruptcy is a powerful form of debt relief, but it does come with a cost. Before you file, talk to a legal professional about your options and how to proceed with your bankruptcy case. Attorneys understand the legal process inside and out, and they can help advocate for you in court.

Speak with a qualified attorney today. Schedule your consultation with Glenn F. Russell, Jr. & Associates P.C. and take back your financial future.