By Dennis L Plank, Attorney
Many Lancaster County residents try to reduce or manage their debt, but often it can spiral out of control unexpectedly. In these cases, bankruptcy is an option that prevents one from being buried under a seemingly endless pile of debt. There are two kinds of bankruptcy that individuals can file for financial relief purposes: Chapter 7, which focuses on debt forgiveness, and Chapter 13, which focuses on repaying and reorganizing debt.
Despite the negative feelings many people have about the process, filing bankruptcy can be a true financial relief and give indebted people a fresh start. However, it carries serious consequences. Before filing for bankruptcy, Lancaster County residents should consider hiring an attorney to explore their debt relief options. Bankruptcy lawyers can look at a filer’s full financial picture and take into consideration the many diverse factors such as debt type, individual income, and interest rates to see if bankruptcy is the best option. An attorney can also advise on whether Chapter 7 or Chapter 13 bankruptcy is preferable. To start evaluating these types of bankruptcy, consider the following options.
When is Chapter 7 Bankruptcy Best?
Chapter 7 bankruptcy is a better option when:
- The majority of the debt is unsecured. Chapter 7 bankruptcy is ideal for wiping out “unsecured” debt – that is, debt that is not tied to collateral such as a home or vehicle. Chapter 7 offers debtors with personal loans, credit card bills, or medical bills to get substantial debt relief through forgiveness. In some cases, this can mean that some types of debt can be wholly eliminated.
- The debtor makes less than the Pennsylvania median income. People making less than the median income for Pennsylvania ($63,463 at time of writing) have a leg up when applying for Chapter 7 bankruptcy. Since Chapter 7 requires means of income testing, factors like income and household size are important for qualifying.
- The debtor has completed credit counseling and established Pennsylvania residency. These two basic requirements are mandated by law for anyone who wishes to qualify for Chapter 7 bankruptcy in Pennsylvania.
- Collectors are calling to threaten wage garnishment or lawsuit. Chapter 7 bankruptcy is ideal when debt collectors are harassing the debtor, with little possibility of an improved financial situation any time soon. Once a Lancaster County attorney files for bankruptcy on the debtor’s behalf, Pennsylvania law allows an automatic stay that stops all collections and prevents collectors from pursuing any further collection activity. That means no more threats, endless phone calls, attachments, wage garnishments, or lawsuits.
When is Chapter 13 Bankruptcy Best?
There are two common situations in which Chapter 13 bankruptcy offers advantages over Chapter 7 bankruptcy. If there is a danger of losing a home to foreclosure, filing for bankruptcy (either Chapter 7 or Chapter 13) will stop all foreclosure proceedings. Although Chapter 7 requires the debtor to liquidate all assets, Pennsylvania law has exemptions that protect certain assets, like a home and primary vehicle. However, if most of the debt is tied to an asset such as a mortgage, then Chapter 7 may not be effective, and Chapter 13 can be a wise choice. Chapter 13 reorganizes and negotiates debt, creating a three- to five-year plan to repay the debt based on income. Under Chapter 13, debtors often end up paying only a percentage of what they owe.
The second instance in which Chapter 13 is best is when the sale of major assets (like a boat, extra vehicle, vacation home, etc.) cannot fully settle debts or the sale will not cover the debt. Chapter 7 won’t work well in this situation, but Chapter 13 can be a valid option. Chapter 13 allows the debtor to submit a repayment plan that protects their assets from foreclosure or repossession. A qualified Lancaster County bankruptcy lawyer can help determine which assets should be sold and which are protected.
Who Doesn’t Qualify for Bankruptcy?
Regardless of the type of bankruptcy, there are some situations that it won’t help, or there are circumstances that make Chapter 7 nor Chapter 13 bankruptcy unhelpful. Here are some common examples:
- Most of the debt is from student loans. If most of a person’s debt is student debt, then neither form of bankruptcy allows for forgiveness of that debt. There are a few rare exceptions, but typically debtors who file for bankruptcy have to get a court to agree that repaying a federal student loan would cause undue hardship. There are several factors weighing the courts’ decision, and the best bankruptcy attorneys can make a big difference in presenting a case to the court.
- Most of the debt is tax debt, alimony, or child support. When the majority of a person’s debt is from taxes, alimony, or child support both forms of bankruptcy are unhelpful. There are a handful of very specific circumstances where bankruptcy can discharge of these types debt, but they are exceedingly uncommon.
- The debtor has funds set aside they aren’t using. Debtors should use any funds available to pay off their debt. Only a few types of accounts are exempt from review by bankruptcy courts.
Explore Your Options at Going and Plank
Filing for bankruptcy is a very serious decision that should not be taken lightly. Bankruptcies remain on credit histories for a full decade after filing. However, for many people, it’s a chance to get back on their financial feet and start fresh. An experienced Lancaster bankruptcy attorney helps their clients make the best choice for each situation. To find out more, contact the expert bankruptcy attorneys of Going and Plank to review debt relief options and get on the path to a better financial future.