Choosing Your Chapter of Bankruptcy

There are several reasons you might need to file bankruptcy – maybe you have unexpected medical bills, overwhelming credit card debt, or your household income has suddenly decreased and you fell behind on your mortgage – but how do you know which chapter of the Bankruptcy Code to file under? For individual consumers, a Chapter 7 or a Chapter 13 bankruptcy are the most common chapters, and various factors must be considered in determining the correct chapter.

 A Chapter 7 bankruptcy is the quickest way to receive a discharge, usually about four (4) months after filing a petition, and will eliminate most of your unsecured debt, such as credit cards and medical bills. However, you must be eligible to file a Chapter 7 bankruptcy. First, you must not have received a discharge in another Chapter 7 bankruptcy filed in the previous eight (8) years, or in a Chapter 13 bankruptcy filed in the previous six (6) years. Second, your household income must fall below the median income for the same household size in the state you reside. In Arizona, the current median income for a household of one is $46,779, and increases for every additional member of the household. If your household income is more than the median income, you may still qualify to file a Chapter 7 bankruptcy, but only if you can pass the “means test” by accounting for certain allowable deductions.

In the event that you can’t qualify for a Chapter 7 bankruptcy due to the above, a Chapter 13 bankruptcy may be an option. When considering a Chapter 13 bankruptcy, you should have some “disposable income”, meaning, after deducting reasonable household expenses from your net household income, there is some left over to pay a monthly installment to a bankruptcy trustee for the benefit of your creditors. There are debt limits that you must consider in filing a Chapter 13 bankruptcy – you cannot file a Chapter 13 bankruptcy if you have more than $1,184,200 in secured debt, or $394,725 in unsecured debt. A Chapter 13 bankruptcy may be especially useful if you have tax debt or mortgage arrears that you can’t seem to get caught up on, but in those situations you must have enough disposable income to pay off those items in five years or less.

It is important to discuss your specific family and financial situation with a knowledgeable attorney that can assist you in choosing the correct chapter of bankruptcy to file under. Mallory Powers is a co-contributor to this press release.