When faced with the daunting possibility of bankruptcy, understanding your choices is crucial. It’s a crossroads where financial realities meet legal obligations. Thus, making the right decisions can significantly impact your future.
One of our readers sent in their queries inquiring about a similar instance. Harriet writes…
“Is it better to try to get a 3-year payback so the recovery process can begin? My husband and I are considering a 13. We have a rental property that, if we claimed a 7, we would lose. We are not happy to have a fixed budget for 5 years. We have one newer car and 1 older one. We don’t think the older car will survive 5 more years. We have seen two attorneys for help, but we left feeling even more confused. Please help!”
Harriet’s Dilemma
Like many of our clients, Harriet faces a common predicament while considering bankruptcy. The Chapter 7 vs. Chapter 13 choice can be tricky, particularly when rental properties, vehicles, and other such assets are in question. Her concern about adhering to a fixed budget for the next five years under Chapter 13, while distressing about the longevity of an older car, is a scenario many of you can relate to.
Harriet may have to pay back 100% of her debt because her rental property has significant equity. The discussion below addresses income, but if you have assets that can’t be protected in Chapter 7 then the payment term matters only to determine the payment amount. For example, let’s say the rental property has $100,000 of unprotected equity and Harriet has $50,000 in debt. The full $50,000 must be paid back in full. If the numbers are reversed ($50,000 of unprotected equity versus $100,000 of debt), Harriet would have to pay back at least $50,000 of her debt.
Chapter 7 vs. Chapter 13 Bankruptcy
When considering Chapter 7, it’s essential to understand that it may lead to the loss of certain assets, like rental properties, to clear all debts. This bankruptcy type suits those with minimal disposable income who cannot meet debt obligations.
On the other hand, Chapter 13 is more apt for individuals with a regular income who can afford to pay back debts over time. It allows for the retention of assets like a home or car but requires a commitment to a payment plan, typically spanning three to five years.
The Means Test Can Be a Decisive Factor
We’d say Harriet doesn’t have a three-year versus five-year repayment plan choice. This decision depends on the income from the six months before the date of filing the case. However, a critical factor in this financial journey can be the “means test,” passed in 2005 by the US Congress.
This test compares your income to the median in your state, impacting your eligibility for different types of bankruptcy. It prevents those with higher incomes from eliminating their debts through Chapter 7 bankruptcy without repayment.
In Harriet’s case, she must have failed the means test. If she makes more income than the state’s median, it’s apparent that she can pay back the debt, in full or partially. However, she can also contest this presumption with appropriate proof of qualifying expenses, as many of our clients did qualify for Chapter 7 despite making more income than the median income.
This particular situation isn’t just about making more or less income. The expenses at hand also have a significant role to play. There are various nuances to the means test and the regulations governing it. Working with an experienced attorney can help expedite your case. It enables you to make informed decisions about your bankruptcy path.
Stuck In A Similar Situation? Contact Westgate Law For Expert Legal Counsel.
Bankruptcy can be a maze of legal and financial decisions. At Westgate Law, we’re committed to guiding you through this complex process with professionalism and empathy. We’re a renowned Los Angeles bankruptcy and debt firm specializing in Chapter 7 and Chapter 13 bankruptcy and bankruptcy alternatives. Our wide-ranging expertise can be your resource for navigating these challenging waters.
Contact Westgate Law for personalized advice and support. Your financial future deserves the best legal assistance.