A personal bankruptcy filing can serve as a legal solution to a mounting financial problem. Individuals dealing with large medical debts or rapidly-mounting credit card balances may consider bankruptcy as one of their options for resolving increasingly overwhelming financial pressure.
Even after making the decision to pursue bankruptcy, the future filer has numerous other decisions to consider. They have to choose what type of bankruptcy to pursue, for example. Most individuals pursuing bankruptcy relief select either Chapter 13 bankruptcy or Chapter 7 bankruptcy. Farmers and fishermen may potentially be eligible for a Chapter 12 bankruptcy, but most people choose either Chapter 7 or Chapter 13 filings.
People frequently prefer to pursue Chapter 7 bankruptcy if it is an option given their circumstances. After all, Chapter 7 bankruptcy can require less than a year to complete, while Chapter 13 filings are much lengthier. How can people determine if Chapter 7 proceedings are the right option for their unique circumstances?
Performing the means test
The first step toward selecting a form of bankruptcy is to determine if the filer passes the means test. Means testing compares household income to the median income of a household of the same size in the same state. Filers make adjustments to their recent income based on certain allowable expenses. They use their last six months of income to calculate their annual household income. Only those who pass the means test by proving that they earn less than the state median given their household size are eligible for Chapter 7 bankruptcy.
Reviewing liquidation exemptions
Chapter 7 bankruptcy is faster than Chapter 13 bankruptcy because it does not involve a multi-year repayment plan. Instead, the trustee appointed by the courts may need to liquidate certain resources to repay creditors before the filer is eligible to discharge their debts. Compiling an inventory of assets and comparing their current value to available exemptions can help filers determine whether Chapter 7 bankruptcy is a viable option.
Those who pass the means test and can protect their property from liquidation may want to pursue Chapter 7 bankruptcy instead of a more complicated form of personal bankruptcy. Reviewing financial concerns and resources with a professional familiar with bankruptcy law can help people determine which type of bankruptcy might be their best way forward.