What You Need to Know Before Deciding to File For Bankruptcy



By:Mike Cibik


What You Need to Know About Bankruptcy

If you’ve gone through all of your options in the face of foreclosures, mounting credit card debt, hospital bills, or any other financial hardship, you might be looking at the last option for many people drowning in debt: Bankruptcy. It can be terrifying, not just because of what you’ve heard about it, but because it’s so complicated.


New laws in 2005 passed by the federal government have made an already complicated process even trickier. It makes just understanding what happens during the process seem overwrought and painful.


It doesn’t have to be so intimidating though. You can learn a few basic things up front about the Bankruptcy process to come to a better grip on the situation. Let’s untangle some of the twisted yarns you may have heard about filing for bankruptcy.


Bankruptcy Basics

The perception people have of bankruptcy is often fundamentally flawed. ‘It’s what happens when you have no money,’ some might say. ‘It’s what you do to get out of debts scot-free,’ others might say. These are inaccurate descriptions that beg for clarification. Here’s a more accurate description:


Bankruptcy is a status filed for when your present income can no longer fully absolve you of debt to your creditors. It is meant to either entirely clear your debt in some cases, or to restructure it in such a manner that repayment of your debt becomes possible. In both cases, filing for Bankruptcy prevents creditors from immediately seizing your assets and keeps them from aggressively contacting you concerning payment.


That description may sound a bit vague –  and it is. But, that’s because there’s not just one type of bankruptcy.


Take Stock of Your Situation

There are several factors that play into what kind of bankruptcy you file for, but there are four big ones. Depending on how much of each you have will determine how you move ahead with a bankruptcy filing. The factors are:

  •     Exempt Assets: The first thing to consider is your exempt assets. They’re basically property that your creditors typically cannot seize in an attempt to pay off your debt (we’ll discuss exceptions to this a little later when we address 2005 Bankruptcy laws). Good examples of exempt assets are the existing equity you have in your home, personal items, or any vehicle you are dependent on.
  •     Non-Exempt Assets: Non-exempt assets are property that is fair game for liquidation. They’re frames as non-essential items. Secondary automobiles, boats, summer homes or secondary living arrangements. These items can, and will, be on a creditor’s list to liquidate to pay off debt.
  •     Secured Debts: Secured debts are any type of asset that can be leveraged against you as some kind of collateral. Regardless of if it is exempt or non-exempt, anything tangible falls into this category: homes, cars, recreational vehicles. It doesn’t have to be your primary home or automobile either. If it’s a physical item, it’s secured debt.
  •     Non-Secured Debt: This type of debt is something more intangible. Credit lent for a service, medical bills, or credit card debt all count as non-secured debt.


I’ve assessed my assets and debts. Now, what’s right for me?

Next, you need to figure out which type of bankruptcy will work best for your situation.


Chapter 7 Bankruptcy: Chapter 7 is best for those who have large amounts of debt, limited means, or who have enough non-exempt assets to satisfy their debt. Chapter 7, will completely satisfy the debts owed, even if you do not have enough assets to satisfy the entire amount.


Chapter 13 Bankruptcy: Chapter 13 is not so much a liquidation of all non-exempt assets as much as it is a way to restructure your debt so that you can pay it back in a manner agreed upon by a bankruptcy court. Non-exempt assets may be liquidated to ease along the plan, but are not required. This option works best for those with enough income to satisfy the repayment plan settled on by the court. Chapter 13 can also stay the foreclosure of a home or stall repossession of property, taking a lot of pressure off of you while you make good on your debts.


The Means Test

Determining which type of bankruptcy you file for has been altered by federal revisions resulting in new laws in 2005. The result of these laws is that you have to qualify by a Means Test in order to file for Chapter 7 Bankruptcy.


The test is somewhat complicated in terms of calculating many economic details, but the overall result is a bit easier to grasp: more filers are pushed into Chapter 13 Bankruptcy than Chapter 7 based on your level of income, how much of that income is considered disposable, and how it relates to your total debt. Here are the steps of the Means Test:

  1. First, you project your income after taxes for the next six months and compare it to your state’s average income. If it’s less than average, you can opt for Chapter 7 Bankruptcy.
  2. Then, you look at your net income. If you have under $100 left over after all of your necessary monthly expenses are taken out of your net income, you may file for Chapter 7 Bankruptcy.
  3. If your disposable income is somewhere between $100 and $166 and your disposable income for the next five years less than 25% of your total debt balance you can file Chapter 7 Bankruptcy.
  4. If you fail any of the above steps, you must file for Chapter 13 Bankruptcy.


The IRS determines how standards of living are calculated based on 2005 laws. Additionally, the laws place very specific limits on exemptions. Due to this, sometimes you may not be able to keep specific assets or even the majority of your home equity. Depending on your local laws, assets and equity can be up for grabs – so you’ll need legal advice to determine which assets are protected.


That Sounds Hard For Bankruptcy Basics

And it is. For good or ill, the reality of the new laws is that they’re designed to make bankruptcy a more difficult process. You’ll have to really need the bankruptcy filing in order to get it, and no matter what… you’re going to need sound advice.


Before anything else, you’ll need to undergo credit counseling with a professional. Credit counselors will be able to assess all of your assets, debts, then help you develop better credit habits and even offer alternatives to the complex process of filing for bankruptcy. While this counseling does bring on some costs, you don’t necessarily have to opt for the assistance of large-scale, top-dollar agencies – there are many non-profit credit counseling organizations that assist in getting you the advice to put everything on the table for consideration.


If bankruptcy seems to be the best option, then you’ll need even more assistance. To determine whether Chapter 7 or Chapter 13 Bankruptcy is right for you, you’ll need the help of a good bankruptcy lawyer. Filing for bankruptcy of either sort is not for the average individual, and an experienced bankruptcy attorney can seek out your best options to put you back on the right track to financial well-being.


The attorneys at Cibik & Cataldo, P.C. have 35 years of bankruptcy experience and will work for you to find the best way to navigate the troubled seas that bankruptcy can bring. By carefully examining your case and advising you on the concrete facts, we let you take charge and are there to guide you through the filing process. Contact us at 215-735-1060 for a free consultation or visit our website to submit a form regarding your case.


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