Chapter 7 bankruptcy and Chapter 13 bankruptcy are a bit different. With Chapter 7, you have debt waived after you liquidate nonexempt assets and pay off as much of that debt as possible with the proceeds. With Chapter 13, you generally do not waive any of the debts, but instead consolidate them into a monthly repayment plan.
When people are considering bankruptcy and looking at the impact on their financial future, they often think that they can choose whether to use Chapter 7 or Chapter 13, just based on their preference. But is that actually how it works?
The means test
While you do have some choices when determining what type of bankruptcy to use, it is not always up to you. For instance, if you are filing for Chapter 7, you have to fill out Form 122A-1. This is a disclosure statement telling the court about all of your monthly income in the six months before filing.
The court will then consider your income and compare it to the median income in the state. If your income is less than the median, then you likely qualify for Chapter 7. If it is over the median, then you may not qualify and may need to look at Chapter 13, instead.
Your monthly repayment plan will be calculated to make it affordable within your post-bankruptcy budget. That is why Chapter 13 is often referred to as a wage earner’s plan—because you have enough income to make these payments. Some people who would qualify for Chapter 7 choose Chapter 13 for strategic reasons.
Everyone is in a unique situation when looking at assets and income, so be sure you know what steps to take and what options you have when considering bankruptcy.