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Should I File a Chapter 7 or Chapter 13 Bankruptcy?

Careful consideration must be utilized when deciding whether you should file a Chapter 7 or a Chapter 13 Bankruptcy. Two important questions you should consider before making a decision on which Chapter of Bankruptcy you should choose to file under are:

1. How much money do you make?
2. What are your goals?

How much money do you make?
Bankruptcy Law in the United States is income sensitive. Simply put, this means your options under current Bankruptcy laws are sometimes determined by how much money you earn. If your income is too high, you will be foreced to undergo financial testing to determine what kind of Bankruptcy you may be required to file. There are two tests used in Bankruptcy to analyze your income for purposes of determining what Chapter of Bankruptcy you can, or must, file under. One test is the “Means Test”, which is an artificial test of your income and expenses. The second test, commonly known as the “I” minus “J” Test, is a true look at your income and expenses. Schedule “I” in your Bankruptcy Petition is a statement of your true curent income. Then you subtract Schedule “J”, which is a true statement of your actual current monthly expenses.

The “Means Test” is a historical look at your income over the six month period that precedes the date you actually file for Bankruptcy, and then you deduct “Means Test” allowances from that income. In “Means Testing”, some of the “expenses” are your true actual “expenses”, while other “expenses” are artificially determined. The artificial expenses may have nothing at all to do with what your expenses truely are. After you complete the “Means Test” Schedule, if you have postive net income, you may be forced into a Chapter 13 Bankruptcy. If the result is negative net income you may be eligible to file a Chapter 7 Bankruptcy.

The second income test emanates from Schedules “I” & “J” of your Bankruptcy Petition, and is used to compare your true current income to your true current expenses. This test represents a more realistic interpretation of your circumstances, because it is determined from what you are earning and spending right now. It is not a determination of your historical earnings and artificially allowed expenses. Under the “I & J” analysis if your monthly income exceeds your expenses, resulting in a net-positive disposable income, you could be forced into a Chapter 13 Bankruptcy.

To be eligible for a Chapter 7 Bankruptcy, both the “Means Test” and “I &J” Test must be satisfied. Otherwise, you will be forced into a Chapter 13.

What are your goals?
The answer to this question is key because there are reasons why someone may elect to file a Chapter 13 Bankruptcy even though they are eligible for a Chapter 7. These reasons include, but are not limited to, the following:

1. Are you seeking to save a home from mortgage foreclosure;
2. Are you seeking to eliminate a 2nd Mortgage;
3. Are you trying to save a home or property which has more equity than you are allowed;
4. Do you need to eliminate divorce obligations (with certain exceptions);
5. Are you tying to keep a vehicle by paying what is is worth, as opposed to what you owe on the vehicle;
6. Do you need to manage the repayment of non-dischargeable student loan debt; and/or,
7. Do you need to manage the repayment of non-dischargeable tax debt.

The answers to these questions should be well thought out and reviewed in consultation with an experienced Bankruptcy Attorney. A well-planned, and properly filed Bankruptcy, can be a life-altering event for the better. You can find the fresh start you are looking for by utilizing the Bankruptcy process, and our Office will be happy to guide you along the way.