People may struggle with weighing the pros and cons for weeks before they reach a decision about bankruptcy. In some circumstances, people are eligible for Chapter 7 bankruptcy. Other times, people may choose to file a Chapter 13 bankruptcy to regain control over their debts.
The decision-making process when selecting the type of bankruptcy to pursue will typically need to include a review of the three financial considerations below to better ensure that someone pursues the right form of bankruptcy given their circumstances.
Can someone pass the means test?
Given that Chapter 7 bankruptcy is relatively fast and discharges someone’s qualifying unsecured debts, there need to be restrictions to prevent abuses of the system. The means test involves calculating an adjusted gross income based on the last six months of wages and then comparing that with the median income based on household size in Massachusetts. Those with higher personal incomes will not qualify to file for Chapter 7 bankruptcy.
What debts can someone discharge?
Oftentimes, Chapter 7 proceedings largely focus on unsecured debts, including payday loans, credit card balances and medical debts. Those with problematic secured debts often pursue Chapter 13 bankruptcy instead. Unlike Chapter 13 bankruptcy, which has financial limitations on the amount of debt someone can discharge, there is no limit to the unsecured debt people can discharge in a Chapter 7 bankruptcy.
Will their assets be at risk?
There are bankruptcy exemptions that allow people to protect certain assets from liquidation during a Chapter 7 filing. In theory, the trustee overseeing someone’s Chapter 7 proceedings could arrange for the liquidation of certain non-exempt resources to pay creditors before the discharge of a filer’s remaining balances. The vast majority of those filing a Chapter 7 bankruptcy don’t have enough non-exempt assets to trigger liquidation, but it’s a good idea to assess one’s personal risk of liquidation before committing to the Chapter 7 bankruptcy process.
Thoroughly reviewing one’s finances with the assistance of a legal professional is usually an important step to take when considering personal bankruptcy. After that review, it is easier for a would-be filer to make informed decisions about their rights and options under the law.