Consumers generally file either a Chapter 7 or a Chapter 13 bankruptcy. Some people wrongly believe that a Chapter 7 bankruptcy is the best way to go, but that is not always the case. Everyone has their own unique situation which should be analyzed by a professional to determine whether a Chapter 7 or a Chapter 13 bankruptcy is more appropriate for you. For example, if you do not have a lot of unsecured debt such as credit card debt or medical bills, but you have a home worth $200,000, a first mortgage of $210,000 and $75,000 on your second mortgage, and you want to keep your house, filing a Chapter 13 bankruptcy may be appropriate for you because you may be able to “lien strip” the second mortgage.
On the other hand, if you have a lot of unsecured debt such as medical bills and/or credit card debt, than Chapter 7 may be more appropriate for you. However, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made changes to the Bankruptcy Code, which makes filing a Chapter 7 bankruptcy more complicated. To be eligible for a Chapter 7 bankruptcy there is a 2 part test. First, there is the “means test”. This subjects debtors to an income based test. But if the debtors income is below the state’s median income, than the debtor is not subject to the means test. Additionally, debtors with primarily (more than 51%) business debts (including investment properties used as rental properties) may file a Chapter 7 bankruptcy regardless.
However, even if you pass the means test, you still have to pass a second test known as the “abusive test”. The United States Trustee or any creditor can move to have your case dismissed. The bankruptcy Court could dismiss your case if the Court finds that you have the ability to pay back a significant portion of your unsecured debts.
If you are eligible to file a Chapter 7 you are looking to liquidate your debt. You are able to keep some property and may have to let other property go. You can keep exempt property.
A Chapter 13 bankruptcy is a form of reorganization. The debtor proposes a plan to pay his creditors over a 3 to 5 year period. Generally, the debtor keeps property and the creditors get less money than they are owed. However, the unsecured creditors must receive at least as much through the Chapter 13 plan as they would have received in a Chapter 7 liquidation.