You may be wondering which bankruptcy chapter to file. Because each person or family’s financial situation is unique, it is best to consult an experienced Alabama bankruptcy attorney for help deciding which chapter to file. Generally, Chapter 7 and Chapter 13 are the most common types of personal bankruptcy filed by consumers. Many people prefer Chapter 7 bankruptcy because it is quicker and does not involve a repayment plan, but you can only file for Chapter 7 if you qualify through the “means test.” If you don’t pass the “means test,” you likely have the resources to repay your debts over a long period of time and will have to file for Chapter 13.
It usually takes just a few months to obtain a Chapter 7 discharge if you qualify. The speed and ease makes this type of bankruptcy more desirable to debtors concerned that they do not have the stamina to make Chapter 13 payments every month for 3-5 years in order to repay as much of their debt as possible. Under Chapter 7, you can protect certain assets such as your home and clothes through “exemptions” although the unexempt assets remain vulnerable to being sold by a Chapter 7 trustee. There is no motor vehicle exemption in Alabama, but you may be able to protect your car with a “wild card” exemption.
After a Chapter 7 discharge, you are expected to be left with just those basic necessities that will allow you to make a fresh start and build towards a new future. Any nonexempt assets will be liquidated when possible and used by a bankruptcy administrator to pay off creditors. You may lose some property in a Chapter 7 bankruptcy in Alabama, particularly if you have very valuable assets such as a house with lots of equity. Therefore, a Chapter 7 makes more sense for lower-income earners with substantial consumer debt, but few assets to protect.
If you fail the means test, Chapter 13 might be your only option. In order to make filing for Chapter 13 worthwhile, you must be committed to learning how to manage your finances and live frugally so that you can pay back your creditors at least a portion of what you owe them. You must also have a job or other stable source of income in order to make monthly payments to the bankruptcy administrator over a three-to five-year period. This payment is based on your disposable income—what you have left after you pay your expenses for the month—and the value of assets you were not able to exempt under Alabama’s system of exemptions.
There are a number of tools under Chapter 13, only some of which are also available under Chapter 7. Chapter 13 permits you to make up missed payments on your car or mortgage, which may allow you to keep those possessions. You can also restructure debts that are not able to be discharged, like student loans, with a Chapter 13 bankruptcy, but not a Chapter 7. Chapter 13 is a better choice for those with income, determination to pay some or all of their debts, and/or more valuable assets which might be lost in a Chapter 7.
Bankruptcy can be a boon to those with crippling debt who want a fresh start. Experienced Montgomery bankruptcy attorney Charles Grainger has substantial experience helping clients determine which type of bankruptcy is appropriate and guiding them through the process. Our office represents clients in South-Central Alabama from our offices in Montgomery, Prattville, and Troy. Call us at (334) 260-0500 or contact us online to schedule a consultation.