When an individual or couple find themselves in financial trouble with debts they cannot afford to pay, bankruptcy is often considered as an option to remove the debt and give the debtor a fresh start. When deciding whether to file bankruptcy there are several issues to consider, including which type of bankruptcy is available.
Chapter 7 is the more commonly filed bankruptcy as it removes most unsecured debt, and secured debt when the debtor plans to surrender the secured asset. In order to qualify for Chapter 7, the debtor must pass a Means Test, which evaluates expected future income by looking at the six-month period prior to the bankruptcy filing date. Expenses during that time are also included in the test. The result of the test helps the debtor and his attorney evaluate whether the bankruptcy trustee is likely to challenge the case for abuse or try to convert it to a Chapter 13 case (where the debtor would be required to pay some of the debt back during the case).
If the debtor passes the Means Test and is not expected to have any substantial increases in income in the near future, the next consideration is whether the debtor’s debts are the type that can be removed in Chapter 7. If most of the debt is from credit cards, medical bills, unsecured loans or deficiencies from repossessions, the debtor should be able to eliminate most or all of the debt (unless there is a large use of credit very close to the bankruptcy filing which might be considered abusive by the creditor or the trustee).
If much of the debt is from recent tax obligations, student loans, or secured debt on property the debtor wants to retain, bankruptcy may not have much of an effect on the debtor’s financial problems, because those debts must still be paid after the bankruptcy concludes.
Another issue is whether the debtor can exempt (protect) all his assets. If some assets cannot be protected using the available California exemption codes, the bankruptcy may not be a good idea, or it may be better to wait until the debtor uses the assets for his own benefit rather than have a trustee liquidate the assets to pay creditors.
It is a good idea to speak with an attorney to evaluate all the issues involving bankruptcy before committing to bankruptcy as a solution to financial problems.
For more information or a consultation, please call 661-210-5657, or e-mail mjf4bk@ca.rr.com.