THE NEW BANKRUPTCY LAW will prohibit some filers with higher incomes from using Chapter 7, who will instead have to repay at least some of their debt under Chapter 13.
UNDER THE OLD RULES, most people could choose the type of bankruptcy that seemed best for them (the majority would choose CHAPTER 7 over CHAPTER 13.)
CHAPTER 7 (often referred to as "liquidation bankruptcy") is commonly used by individuals who simply want to walk away from their debts, or by businesses that want to cease their operations and liquidate their assets.
Now to fill a Chapter 7 bankruptcy you must measure your current monthly income (average income over the last six months before you file) against the median income for a family of your size in your state.
You will be able to file for Chapter 7 if your income is less than or equal to the median. If it is higher than the median, you must pass another requirement of the new bankruptcy law in order to file for Chapter 7, called "The Means Test."
Created to find out whether you have enough disposable income to make payments on a Chapter 13 plan, the means test is basically getting your current monthly income and subtract certain allowed expenses (set by the IRS) and monthly payments you will have to make on secured debts (mortgage or car loan) and priority debts (taxes, child support, alimony, and wages owed to employees.)
If after subtracting these amounts your total monthly disposable income is less than $100, you pass the means test, and will be allowed to file for Chapter 7.
If your total remaining monthly disposable income is more than $166.66, you have flunked the means test, and will be prohibited from using Chapter 7.
If your remaining monthly disposable income is somewhere between $100 and $166.66, you must figure out whether the money you have left is enough to pay more than 25% of your unsecured, non priority debts (medical bills, credit card bills, student loans) over a 5 year period. If so, you flunk the means test, and won't be able to fill Chapter 7. If not, you pass the means test, and Chapter 7 can be used to wipe out your debts.
CHAPTER 13 BANKRUPTCY (often called "wage-earner plan") is generally used by employed people with stable incomes who are in a temporary financial crisis and want to repay at least some of their debts (assuming that their income will grow enough in the next few years to pay off all debts.)
The main advantage to Chapter 13 Bankruptcy is that the debtors are allowed to keep their properties while a court-approved repayment plan is in effect.
Only an individual with less than $100,000 in unsecured debts and less than $350,000 in secured debts is eligible to file a Chapter 13 bankruptcy. Corporations and partnerships cannot file Chapter 13 bankruptcies.
You will have to get credit counseling before you can file a bankruptcy case to give you an idea of whether you really need to file for bankruptcy or a repayment plan would get you back on your feet. Then, after your bankruptcy case is over, you must attend another counseling session, now to learn personal financial management. Only after you submit proof to the court that you attended both programs your debts can be wiped out by a bankruptcy discharge.
The new bankruptcy law adds some complicated requirements to the field of bankruptcy and imposes some additional requirements on lawyers. Attorneys now will have to spend more time on bankruptcy cases.
This means that bankruptcy attorney fees are going to be more expensive and will be harder to find an attorney to represent you in a bankruptcy case.