Most consumer debtors file for bankruptcy under a Chapter 7 or a Chapter 13. If you are having financial problems, you may not be sure which bankruptcy is right for you. The answer will come down to the type of debts that you have, how much debt you owe, and your income.
Essentially,Chapter 7 bankruptcy is reserved for debtors who do not have a lot of income; it’s for the debtors who truly need it. On the other hand, Chapter 13 is for debtors who don’t qualify for a Chapter 7 because their income is too high.
Overview of a Chapter 7 Bankruptcy
With a Chapter 7 bankruptcy, many types of unsecured debts can be discharged or otherwise “wiped out” or “erased” through the bankruptcy discharge.
This means that once a debt is discharged, the debtor is no longer legally obligated to repay the debt. Types of debts that can be included in a Chapter 7, include:
- Credit card debt
- Personal loans
- Certain taxes (older than 3 years)
- Medical bills
- Utility bills
- Cellphone bills
Not all debts can be discharged in a Chapter 7. For example, a debtor cannot include spousal support, child support, court-ordered fines and victim restitution in a Chapter 7.
If a debtor has very little income and a lot of unsecured debts, such as medical debt or credit card debt, then a Chapter 7 may provide the financial relief that they desperately need. However, the debtor’s income must meet the guidelines in order to qualify. If the debtor’s income exceeds the threshold, they will have to file a Chapter 13 instead.
With a Chapter 13, the debtor goes on a 3 to 5 year bankruptcy repayment plan where they pay off all or a portion of their debt over that period of time.
Of course, their monthly obligation and the total amount that they pay is based on their financial ability to repay their debts. If the payments were unaffordable, it would defeat the purpose of a Chapter 13.
Do you qualify for a Chapter 7?
If you are interested in filing a Chapter 7 bankruptcy, the first order of business will be to see if your income is low enough to qualify. You will have to take the bankruptcy “means test,” and we can help you with that.
We need to determine if your income is above or below the median income in Pennsylvania for a household of your size. If your income falls below the median income, you automatically qualify for a Chapter 7 – but you can choose to file the Chapter 13 if you prefer it.
If your income is above the median, you may still qualify but we will have to review your expenses and secured debt payments to determine if it’s a possibility. If you still don’t qualify, you can file a Chapter 13, which can still bring tremendous debt relief.