Finance

When bankruptcy becomes a necessity because of a bad financial situation, an individual will have to determine whether they should file for Chapter 7 or Chapter 13 bankruptcy. Understanding the differences between them is very important because they are separate and unique filings.

Chapter 7 bankruptcy is the one that most people seek to file. When a person files for bankruptcy under Chapter 7, their assets are liquidated to pay what is owed to the creditors. The courts decide on a reasonable amount for payment based on individual circumstances.

One hundred percent of the person’s assets will not liquidated. In some cases, people who file for Chapter 7 bankruptcy are able to keep their home and car. The liquidation process is based off of specific state laws.

In October 2005, the laws concerning Chapter 7 bankruptcy were changed. Now, there are tests that have to be passed in order to file for Chapter 7 bankruptcy. A person’s income must be lower than the determined median income for the state in which they reside. Also, a person must not have the assets available to pay at least twenty-five percent of their debt owed in order to qualify to file under Chapter 7.

Special circumstances have to be demonstrated by the filer in order to override the testing requirements. Special circumstances were extended to victims of Hurricane Katrina so that they could have the chance of a new start after the flooding disaster that destroyed their homes. If the judgment is against filing for Chapter 7 you may appeal, but this involves another trip to the courts and extra expense. If you feel that you need to be heard, it could be worth it.

Chapter 13 bankruptcy provides filers with a specific window of time in which creditors must be paid back and a way to do it. This does not require asset liquidation, and the amount you are required to pay is decided upon by the court after they have reviewed your personal case.

Under the new bankruptcy laws, this process is a little different. The court used to decide what expenses where necessary for you to pay and what were not. Necessary expenses where things like rent/mortgage, groceries, utilities, and so forth. Under the new law, a formula developed by the IRS determines this.

The government wants people to think long and hard about filing for bankruptcy. Before any bankruptcy proceedings take place, the potential filer must attend credit counseling. Also, the government can liquidate or non-exempt any assets that were purchased right before bankruptcy was declared. The attempts to hide money within property not subject to seizure are no longer an option for abusers of the system.

Bankruptcy filing is a serious matter. If you are determined to file, know which type you stand a chance of qualifying for with the courts. Since laws are tougher, be aware that bankruptcy lawyers will charge more for their part in the process.