What Should You Consider Before Filing Bankruptcy?

The most important thing to consider before filing for bankruptcy is first determine whether or not you even need to file. The lawyers at Melaragno, Placidi & Parini can help you make that important decision. The next question is what type of bankruptcy is best for you. Generally, an individual has two choices: Chapter 7 or Chapter 13. Each type of bankruptcy has its advantages and disadvantages. Only you, with the guidance of an experienced bankruptcy attorney, can make the choice as to what suits your unique circumstances. What Chapter 7 bankruptcy means Depending on your circumstances and reasons for filing for bankruptcy, you need to understand what a Chapter 7 bankruptcy means for you. Chapter 7 wipes out most of your general unsecured debts which is why it is also called a liquidation bankruptcy. Unsecured debts include things like credit card bills. When debt is wiped out in a Chapter 7 bankruptcy, it is completely gone and you do not need to pay back balances via a repayment plan as you would in a Chapter 13 bankruptcy. However, to qualify for a Chapter 7 bankruptcy you need to meet income requirements. Once a Chapter 7 bankruptcy has been filed, an “automatic stay” order is issued. It halts your creditors from calling. You are also appointed a bankruptcy trustee who reviews your documentation and sells non-exempt property to pay your creditors (that is why a Chapter 7 bankruptcy is sometimes called a liquidation bankruptcy). If you do not have non-exempt assets, creditors receive nothing. The property you can protect (exempt) depends on the state where you live. Your Pennsylvania bankruptcy attorney can provide you with a list of exemptions that will be applicable in your case. In Pennsylvania, you have the option to use Pennsylvania State Exemptions or the Federal Exemptions. Depending on your situation, it may be better to use one over the other. Chapter 7 bankruptcies usually work well for low to medium income debtors who do not have much in the way of assets. Each case is different and all aspects of a potential bankruptcy need to be examined before making any decisions about which Chapter to file under. What Chapter 13 bankruptcy means A Chapter 13 bankruptcy is referred to as a reorganization bankruptcy rather than a liquidation bankruptcy. A Chapter 13 bankruptcy is for those with a regular income who have money left over every month to pay back a portion of the debts via a repayment plan. Those who file a Chapter 13 bankruptcy usually make too much money to qualify for a Chapter 7 filing or have fallen behind on a secured debt (house or car payment) and need time to catch-up on those payments. However, many debtors choose to file Chapter 13 due to the fact that it offers many benefits not found in a Chapter 7 liquidation bankruptcy. With a Chapter 13 filing, you keep all of your property, and non-exempt assets but you pay an amount equal to the value of your non-exempt property. In return, you pay back a portion of or all of your debts via a repayment plan. The amount you pay back is usually determined by your wages, expenses and the type of debt. Generally a Chapter 13 is for those who:
  • Do not qualify for Chapter 7
  • Have non-dischargeable debts like child support and/or alimony
  • Are behind on a car or house payment and want to get caught up to keep the property
This quick comparison list helps you to see the differences between Chapter 7 and Chapter 13 bankruptcy in Pennsylvania
Chapter 7 Chapter 13
Type of Bankruptcy Liquidation Reorganization
Who Can File? Individuals/Businesses Individuals only (Includes sole proprietors)
Eligibility Restrictions Low Disposable income to pass Ch. 7 means test Cannot have more than $419,275 of unsecured debt or $1,257,850 of secured debt (as of April 2019)
How Long Does It Take to Receive a Discharge? Typically 3 to 4 months Upon completing all payments (3 to 5 years)
What Happens to Property in Bankruptcy? Trustee can sell all non-exempt property to pay creditors Debtors keep all property but must pay unsecured creditors an amount equal to value of non-exempt assets
Allows Removing Unsecured Junior Liens from Real Property Through Lien Stripping? No Yes (If requirements are satisfied)
Allows Reducing the Principal Loan Balance on Secured Debts? Yes, only on tangible personal property Yes (If requirements are satisfied)
Benefits Allows a quick discharge for a fresh start Allows debtors to keep property and catch up on missed payment and non-dischargeable priority debts.
Drawbacks Trustee can sell non-exempt property. No way to catch up on missed payments to avoid foreclosure/repossession. Makes monthly payments to trustee for 3 to 5 years. May have to repay a portion of general unsecured debts.
Filing for bankruptcy is challenging and fraught with questions. The bankruptcy process has many rules and regulations that are not always clear. This is why, no matter what Chapter of bankruptcy you choose, it is best to consult with an experienced bankruptcy attorney. At Melaragno, Placidi & Parini we here to help you make the right choice. Give Melaragno, Placidi & Parini a call as soon as possible. We offer a free consultation and can help you file for bankruptcy even during quarantine. Let us help you get your life back on track.