Bankruptcy by the numbers: Which chapter is right for your financial situation?

It is uncomfortable simply to consider filing for bankruptcy. So much stigma is attached to the term – and the process. But our attorney, who focuses on bankruptcy law for Scaringi Law, sees bankruptcy in all its forms merely as a tool to help clients in seemingly unwinnable financial situations.

Still, making a sound decision regarding bankruptcy is about far more than deciding to declare it.

One must select the right bankruptcy to fit his own unique situation in order to have the best chance at making the law work toward achieving a financial second chance.

This is why Sembach is there to carefully guide clients through bankruptcy by the numbers – 7 and 13.

The following is a closer look at the meaning behind the numbers.

Chapter 7 can add up to a lucky second chance for households of average means

Chapter 7 bankruptcy is commonly known as liquidation – selling off one’s assets to pay down debt. Under the law, certain assets can be protected, including a home, one’s personal vehicle, jewelry and other household items. There are dollar limits for the amount of asset protection available under each asset category. A skilled attorney such as Sembach is a master at maximizing the full asset protection available.

Chapter 7 also involves a trustee appointed by the court. The trustee takes control of all non-protected assets and sells them off to help satisfy outstanding debt. Sembach says his goal in guiding clients through Chapter 7 is to fit as many assets as possible into protected categories.

“It can be a game at times,” he says. “If one exemption is maxed out, you can try to use one of the other exemptions. There’s even a wild-card exemption.”

With the right legal advice and proper asset planning, the average consumer can protect significant portions of assets under Chapter 7 – provided they qualify. Under the 2005 bankruptcy amendments, there is a means test to determine eligibility.

“Chapter 7 is not for everyone,” Sembach says. “The 2005 amendments were designed to curb debtor abuse. Chapter 7 is for people of average means with unsecured debt – mainly credit card debt and medical bills.”

Yet the benefits can be significant: “Most of the debt is discharged,” Sembach says, noting, however, that tax debt cannot be discharged. “The process is also rather quick. From start to finish, it usually takes about four months.”

As with any bankruptcy, a Chapter 7 filing will remain on a person’s credit record for a full 10 years from the date of filing. Sembach recommends it for clients who meet the income limits and who have at least $10,000 in unsecured debt.

For clients fitting this description, Chapter 7 can be a welcome and much-needed second chance at financial freedom.

“There is a sense of starting over,” Sembach says. “People need to have the basic needs of survival. Chapter 7 tries to strike that balance with some asset protection. I personally love doing Chapter 7 because people can get so much benefit. It’s ideal for someone who came into some tough economic times, suffered some illness or injury with a lot of medical bills, or was out of work.”

Chapter 13 assists higher-earning families and/or those who have fallen behind on payments for homes and other assets

Bankruptcy is not one size fits all. So if a client fails to qualify for Chapter 7, another number usually fits the bill. That number is Chapter 13.

“The major reason for filing Chapter 13 is the client has secured debt that they are behind on paying,” Sembach says.

Chapter 13 culminates in a comprehensive payment plan designed to aid the client in catching up on past-due secured debt as well as paying a portion of his unsecured debt. The monthly payments go to a bankruptcy trustee, who then funnels payments to the creditors.

Clients even receive a coupon book from the trustee, which lays out their payments much like a car loan. Some clients like the option of voluntary wage attachment to ensure plan payments are made.

“The judge has final word on payments,” Sembach says. “It’s all case-by-case basis. The plan provides for how creditors will be paid. Some of the creditors are paid in full.”

Chapter 13 helps stressed debtors keep protected assets, but clients must remain realistic about what they can afford

Payments under Chapter 13 vary. Sembach has seen plans for as little as $100 a month to upwards of $2,500 a month. The plans usually span three to five years. But the payments should be realistic so that the plan doesn’t fail, landing the client back in court.

“There are a million different ways to draw up a plan,” Sembach notes. “The payments can be low at first, then increase. We can structure the payments to fit the client.”

Sometimes, though, there is just no way for a client to keep certain assets.

“That’s where we talk about selling assets,” Sembach adds, noting that assets can be sold in Chapter 13.

The idea is to structure Chapter 13 plans so that the client has a realistic shot of successfully completing the payments.

“We are required to list the debtors’ monthly expenses, so the court can see and consider everything,” Sembach notes. “You will still have enough money at the end of the month to put food on the table and gas in the car, that kind of thing. The idea is to have a realistic shot.”

Unfortunately, not every client can manage the payments under Chapter 13.

“A lot of Chapter 13s fail,” Sembach laments. “Nobody likes to see them fail. Does it happen? Yes. It can be frustrating. We have to go back to court. Sometimes it means repeated trips to court.”

If the court rules a breached Chapter 13 plan ultimately unworkable, the case is dismissed and the client might lose assets.

But the best advice of this attorney so intimately familiar with bankruptcy law and all its ramifications is to stay current on one’s mortgage, first, and other debts, second — even if this means skipping payments on credit cards, medical bills and other unsecured debt.

This way, if it ever comes down to it, the person would stand a better chance at maximizing the financial protections available under bankruptcy law.

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