If you've reached a point where your financial obligations outpace your ability to handle them, you may need to consider filing bankruptcy. For many people with a lot of medical debt, credit card debt or accounts in collections, bankruptcy can offer relief from collections activity and a fresh start for building a better financial future. If you're considering bankruptcy, one of the first decisions you'll make will be whether to pursue Chapter 7 or Chapter 13 bankruptcy.
Chapter 13 bankruptcy allows you to restructure the repayment of your debt over several years. This kind of protection benefits those in debt by helping them arrange manageable payments and allowing for a partial discharge of some debts after a set period of time. For some people, however, Chapter 7 bankruptcy can provide even faster and more complete debt relief. Chapter 7 does not require repayment and allows for a discharge of debts immediately following bankruptcy proceedings, not after years of payments.
In order to file for Chapter 7, you must pass a means test
Companies like banks and credit card issuers could suffer financially if borrowers abuse the debt forgiveness offered under Chapter 7 bankruptcy. To offset that risk, laws specifically limit who may file for Chapter 7 bankruptcy. These individuals must have an income over the previous six months before filing bankruptcy paperwork that is lower than Michigan's current median income level, as determined by Census information.
If your income clearly falls below median family income for the size of your family, you qualify. If your gross income is over the median income for your state, it's possible that you could still pass the means test.
The means test will allow deductions for certain expenses, such as rent or mortgages. The amount you can deduct for housing and utilities expenses is capped, based on the county in which you live. For those who are close to the threshold, careful financial analysis may be necessary to determine eligibility.
How Chapter 7 bankruptcy benefits you
When you struggle to make minimum monthly payments, interest and fees can leave you with a rapidly building debt load. Even for those whose finances were under control, it only takes a single illness or accident to result in lost pay and missed payments. When you know your debt has exceeded your ability to repay it and is impacting your ability to provide for your family, Chapter 7 bankruptcy can offer a fresh start with fewer monthly financial obligations.
Chapter 7 bankruptcy also provides a stay of collection activity when you file. That could stop a pending lawsuit or even a wage garnishment attempt. While bankruptcy will leave a blemish on your credit report for a decade, that may well be preferable to multiple accounts in collections or court records of lawsuits.