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Factors to consider when deciding between Chapter 7 and Chapter 13 bankruptcy, P.1

In our last post, we mentioned that there are different goals, requirements and outcomes for bankruptcy cases depending on whether one files for Chapter 7 or Chapter 13 bankruptcy.  As we noted, the big difference between Chapter 7 and Chapter 13 bankruptcy is that the former pays off creditors by liquidating the debtor's nonexempt assets, while the former allows a debtor to repay creditors over a three to five year period of time.

One important consideration debtors need to keep in mind when determining which form of bankruptcy they should file for is whether is the financial eligibility requirements. For Chapter 13 bankruptcy, one of the eligibility requirements is that the debtor does not exceed certain debt limits. At present, unsecured debts must be less than $383,175 and secured debts must be less than 1,149,525. Debtors who have more debt than this may only be eligible for Chapter 7 bankruptcy. 

In Chapter 7 bankruptcy, there is no limit on the amount of debt one may have. The key in Chapter 7, rather than debt amount, is income and assets. A debtor whose income exceeds the median income for his or her state must be able to pass the so-called means test, which we've previously written about on this blog. As we've noted, the means test takes into account a debtor's income and expenses, and makes calculations based on that information. The means test specifically determines the amount of money a debtor has to pay off other debts after allowing for living expenses and certain debts.

In our next post, we'll continue with this discussion and look at some other considerations that should be weighed when determining the right form of bankruptcy filing.

Sources:

United States Courts, "Chapter 7-Bankruptcy Basics," Accessed Feb. 22, 2016.

United States Courts, "Chapter 13-Bankruptcy Basics," Accessed Feb. 22, 2016. 

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