Please note, I am a licensed Las Vegas Bankruptcy Lawyer who exclusively represents consumers. However, the information in this article is general and applies to all states. Also, this article is general legal advice. So, consult a lawyer barred in your state for any questions about your particular situation.
If you’re thinking about filing bankruptcy you need to read this first. This article is a good starting point for you to discover exactly what bankruptcy does for you and also bankruptcies limitations.
Las Vegas Bankruptcy 101
Chapter 7 and Chapter 13 are the two most common types of consumer bankruptcies. If you are contemplating bankruptcy; you need to know the differences between the two.
Bankruptcy In General
Both chapters have the automatic stay, which stops almost all lawsuits or collections against the debtor. An automatic stay includes preventing a collector from collecting on a judgment against you. So, both the chapter 7 and chapter 13 bankruptcy will, in the vast majority of cases, stop garnishments. Also, both bankruptcy chapters use trustees. A trustee is a lawyer (technically they don’t have to be a lawyer. But, in Las Vegas all trustees are lawyers) who handles your bankruptcy case. A trustees job is to make sure all bankruptcy rules are followed and that the creditors, if applicable, are adequately compensated.
Chapter 7 Bankruptcy
A Chapter 7 bankruptcy, eliminates most of your debts. Some of the debts that a chapter 7 eliminates are credit card bills, medical bills and you can surrender your car without having to pay for any deficiency. However, depending upon what you owe, with a Chapter 7, you may be expected to liquidate your property to pay off your debtors. For example, with a chapter 7, you won’t be able to keep rental properties or timeshares. However, chapter 7 does allow certain assets to be exempt from the liquidation. Each state has their own exemptions. Nevada’s exemptions are listed here.For example, in Nevada, you can keep your car if it worth $15,000 and a house with equity up to $550,000. (Assuming a homestead exemption was filed two years before you file for bankruptcy). Also, you are allowed to keep a single gun and furniture worth up to $12,000. Essentially, filing a Chapter 7 bankruptcy will not leave you destitute; but, you also will not be able to keep your Rolls Royce or Ming vase.
For the majority of people, Chapter 7 is the best alternative. However, with the 2005 bankruptcy reform, a consumer can only file a chapter 7 if they pass the means test. The means test sets the maximum income that you can make to file a chapter 7 bankruptcy. These income standards are based upon the state median wage and number of dependents that you have. Your median wage is calculated using a six-month average of your gross wages. If you make more than the median salary, for that six months, you may not be able to file a Chapter 7 and your expenses will then have to be analyzed to see if you can somehow qualify for a chapter 7. Thus, if you have unusual expenses, like having to pay for expensive medicine every month or have a special needs child, you still could qualify for the chapter 7. However, if you have average expenses and your wage are over the median, you’ll be most likely forced to file a chapter 13.
Some of the other reasons you would not file a chapter 13 bankruptcy are if you recently filed a chapter 7 bankruptcy, (you can only file chapter 7 bankruptcies once every eight years) or you want to save your house from foreclosure or your car from repossession.
Chapter 13 Bankruptcy
As stated, some of the main reasons for filing a chapter 13 are that you don’t pass the means test, you recently filed a chapter 7, you are behind on your mortgage or auto payments, and you want to stop an imminent foreclosure. Also, a chapter 13, unlike a chapter 7, may not require you to sell any assets to pay off your debtors. So, you may be allowed to keep a rental, vacation property, boats, campers, and ATVs.
A Chapter 13 is essentially a loan consolidation where you’ll pay the trustee for three to five years a set payment and the trustee, in turn, will pay the creditors. After the three or five your period, depending upon the debt, all of your debt may be discharged. Your payments are based upon your income less your justifiable expenses. The expenses are calculated using the IRS standards of what the IRS feels a particular family of your size should spend in your geographic area. The plan payment also adjusts upward or downward depending upon if your gross income changes. You may or may not pay 100% of your outstanding debt back over the three or five years.
There are many advantages of chapter 13 some of which are listed below:
1. Save Your Home: You’ll be able to save your house from foreclosure as it allows you to make up missed mortgage payments. The missed mortgage payments will be placed in your “plan” where you’ll be able to pay off the past due payments from three to five years.
2. Strip Off Second A Mortgage: If your house is under water and equity does not secure your second mortgage, you may be able to discharge your second mortgage. For example, you have two mortgages. The first mortgage is $100,000 and the second mortgage is $20,000. The house is only worth $120,000. By stripping off the second mortgage, you will know only have to pay $100,000.
3. Lower Interest: You can get car payments as low as 5.25% under a chapter 13. Also, you’ll be able to stop all interest on many other types of loans.
4. IRS Debt: You’ll be able to stop accumulating IRS interest.
5. Cram Down: It is most commonly used on automobiles. With a cram down you’re able to get the balance owed on your car down to the market value.
A chapter 13 does have several disadvantages. First of all, chapter 13 lasts for three to five years whereas chapter 7 is completed in three months. And, if you aren’t paying 100% of your debts back, you could be under a relatively strict budget. For example, you’ll need the trustee’s permission to purchase items like a plane ticket, and you’ll have to stop making voluntary contributions to retirement.
Conclusion
Chapter 13 is a good option for many debtors. However, unless you can’t pass the means test, you should think twice before filing a chapter 13. You need to ask the following questions: Do I need to keep this car or would I be better getting a cheaper car with lower payments? Can I afford these mortgage payments after I get caught up and finish making all of my payments?
If the answers to the above are no, you need to consider options other than bankruptcy or, if you’re able, file a chapter 7.