Bankruptcy is handled in the federal court system, in New York and elsewhere. However, there are variations from state to state involving exemptions and income requirements needed to qualify for the two most common chapters of bankruptcy used by individuals. Chapter 7 is filed in approximately 70 percent of bankruptcy cases. A Chapter 7 filing will generally eliminate most unsecured debt. However, it may also require selling most assets including homes and cars. The most common option for those who wish to keep their primary residence and car is to file Chapter 13. This may be of interest to New York readers since bankruptcies are still at high levels all over the country.
Chapter 13 is a long-term plan that allows individuals to pay back a portion of their debt with the oversight of a bankruptcy trustee. The plan usually lasts from three to five years and, the amount paid back is based on the household income. The trustee collects the monthly payment and distributes the funds to the creditors. People in Chapter 13 can generally keep their home and vehicle as long as they can demonstrate there is enough income to cover the payments.
The first step in filing for bankruptcy is attending a credit counseling program that is government approved. In the session, the household’s financial situation will be assessed. If the potential bankruptcy filer’s median income is higher than his or her state average, a means test must be completed, which basically compares income coming in to monthly expenses. If there is money left over to pay some of the unsecured debt, the filer will need to use Chapter 13.
Individuals who find themselves mired in debt may wish to allow to review the his or her financial situation and recommend which chapter of the Bankruptcy Code best suits the situation. The long-term nature and budgeting of a Chapter 13 filing is sometimes difficult, but it offers an opportunity for a fresh start.
Source: Fox Business, “Chapter 13 Bankruptcy: How it Works“, Susan Ladika, May 09, 2013by